High Yield Bonds: Assessing the Landscape Today

Greg Campion: With attractive yields relative to history and a fairly benign economic backdrop to date, high- yield bonds have remained an allocation of choice for global investors in 2024. But as always, the risk reward equation is constantly evolving, and with question marks around economic growth and the future path of interest rates on the tops of investors' minds, a fresh assessment of the fundamental and technical backdrops for high- yield may prove to be timely.

Kelly Burton: With the upcoming presidential election and concerns increasing about a slowing economy, it's possible the volatility we've been seeing can persist through the end of the year. That being said, we're not afraid of volatility here at Barings. In fact, some of our best alpha generation has come in pockets of weakness in the market. It's just key to having a big team so that we can do the right work and put on the right trades.

Greg Campion: That was Kelly Burton, High- Yield Portfolio Manager at Barings, and this is Streaming Income, a podcast from Barings. I'm your host, Greg Campion. Coming up on the show, high- yield bonds, assessing the landscape today. Before we get into the conversation, if you're not already following us and you're interested in hearing our latest thoughts on asset classes like high- yield, private credit, real estate, and more, just search Streaming Income on Apple Podcasts, Spotify, YouTube, or wherever you get your podcasts. With that, here's my conversation with Kelly Burton. All right, Kelly Burton, welcome to the podcast.

Kelly Burton: Thanks.

Greg Campion: I'm excited to have you here and I appreciate you making the trek in this morning. Just to set the scene for our listeners, we are in our Charlotte, North Carolina office today. We're sitting on the top floor. There's a lot of windows around us, which is significant, because it is hurricanning outside today, if that could be a verb. But I want to thank you for making it in here today-

Kelly Burton: Sure.

Greg Campion: ...and thank our crew, our behind- the- scenes crew here who makes this podcast happen and who are kind of unsung heroes of this podcast all made it in today. So hey, we're making a podcast in a hurricane today. It's exciting.

Kelly Burton: Works for me.

Greg Campion: All right, cool. Well, this is your first time on the podcast, amazingly enough, so I'm psyched to have you here. I was just thinking maybe for our listeners and viewers who don't know you, it'd be great to hear a little bit about your background and what you do at the firm.

Kelly Burton: Of course. So my career started in finance about 24 years ago on the sell side, and I began in investment banking and then rotated out to the trading floor to do high- yield research. So over my time there, I covered a number of industries, but in 2013 came over here to Barings as a high- yield research analyst, and I picked up the cable and telecom sectors, became the sector head for the broader TMT team, and then in 2017 moved into the role of portfolio management. So, sit with all the PMs on our team. We all really work collaboratively together, but my day- to- day role is working with our higher quality accounts, so those who are investing in single B and BB names, trying to be real careful around any CCC risk in the market, and then I also work on our senior secured bond strategies.

Greg Campion: Awesome, awesome. Well, I want to get into all of that. Obviously, we want to talk a lot about high- yield today. I want to ask you about that senior secured bond strategy as well,'cause that's kind of a lesser known part of the market. Usually compliance does not like us to traffic in rumors in this podcast, but I did hear a rumor that you were some kind of an all- star gymnast in college. Is that true?

Kelly Burton: I would maybe take off the all- star part-

Greg Campion: Okay.

Kelly Burton: ... butI grew up here locally in Charlotte, went to a gym here and competed for Clemmer Gymnastics, which is no longer in existence, but a couple of brothers ran the gym. Loved the sport, taught me a lot about discipline and hard work. I was there six days a week and I was fortunate enough to make it onto the UNC Chapel Hill team, I kind of walked my way on there. I was very much more of a bench rider. If there's five girls that go up, I would maybe be sixth, seventh, or eighth on the team, but it was a lot of fun. I was in the best shape of my life and have made lifelong friendships from my time there.

Greg Campion: Yeah, that's awesome. That's awesome. Well, in this Olympic season where we've all been kind of captivated by that team, I'm sure that's exciting for you to watch with your daughters, and I'm sure you have a whole different lens on it than the rest of us.

Kelly Burton: I do. I love a good comeback story, and so seeing Simone Biles winning all those medals, it was great to see.

Greg Campion: Yeah, yeah.

Kelly Burton: I do know what the twisties are like, I've definitely had them before.

Greg Campion: Right. I cannot even imagine. Being upside down, yeah, that's not my arsenal. So all right, well, thank you for that. Appreciate that, and I will try hard not to overuse the metaphors of doing back flips to try to avoid losses in high- yield and things like that. But all right, so let's dive in. We're talking about high- yield bonds today. I want to cover fundamentals and technicals, kind of get your view on how the market is shaping out, particularly with the backdrop of increased volatility that we've seen recently. So, why don't we start on the technical side. It'd be interesting to hear how you would assess that kind of technical strength or weakness of the market today.

Kelly Burton: Sure. Today, technicals honestly remain quite firm. Taking a step back going over the last couple of years, the global high- yield bond market has shrunk in size by about 15%. During COVID, we had a wave of names come our way, fallen angels from investment grade and many of those started migrating back out of the market back into investment grade, they became rising stars, so we were losing a lot of paper. Clearly the markets were more challenging in 2022, 2023, so the new issue market was quite subdued. So again, less places to go with capital out there that was invested in high- yield. Meanwhile, our fund flows have been quite positive this year. We've taken in over$ 10 billion of inflows into the asset class. While the new issue market, it's picked up a lot year over year, we're up about 70% or so, most of it has been dedicated to refinancing, so there's not been a lot of new risk added into the market. The M& A pipeline has remained pretty muted overall. Maybe some of that begins to pick up once we get past the election cycle and management teams have more clarity around what the tax regime or regulatory environment looks like, but for now it remains quite stable. Even with the latest bout of volatility we've seen in the broader markets, you could tell the market wanted to be bought. As soon as spread started widening out pretty meaningfully, buyers were stepping in.

Greg Campion: Yeah, that is really interesting. So if you zoom out, you mentioned the market's kind of shrunk, the asset class has seen inflows, so in theory you've got more capital chasing less opportunities, so it seems like there's that strong undercurrent. Again, you kind of mentioned this period of volatility. I was talking to you and some of the other folks on the high- yield team, it was kind of interesting, I think, that you all didn't necessarily on the... specifically on the day that we saw the most volatility, there wasn't necessarily an opportunity to buy in size on that day. Do I have that right?

Kelly Burton: That's right. When we were in that pocket where the weak NFP front came out and sort of spooked the market, we also had this unwind of the yen carry trade, which I'm no currency expert, but not really related to high- yield companies themselves.

Greg Campion: Yeah, yeah, yeah.

Kelly Burton: But things started gapping out a bit and those are some of the days where the market just kind of staring at the screens and trying to sort out, okay, when rates are moving so quickly, where spread's going to land, how is high- yield going to reprice and reset? So, for a couple days it was pretty low volumes out there. Especially the higher quality part of the market, people would love to buy lower, but there's a lot of sellers that are not going to be motivated to sell if they have to get down or point or two.

Greg Campion: Yeah, yeah.

Kelly Burton: So, there's just a lot of staring at the screens and at each other's side and waiting for it to settle out a bit, the volatility.

Greg Campion: Yeah. Yeah, I mean, to me it's just always interesting. There's obviously so much more nuance behind the price on the screen, so to me it's always interesting to hear the trader's perspective on, well, can you actually put capital to work here in size? I think that's what you're saying is kind of indicative or proves the point that there is this strong technical undercurrent capital on the sidelines ready to buy weakness in the market. So, that's really interesting. Okay, well, you talked about the volatility that we've seen and depending on when this podcast gets released, usually there's several days in between when we record it and when it's published, we maybe see more volatility. But we've seen a bunch of stuff going on, so we had the weak jobs number, we had an equity market sell off. We even had Warren Buffett selling half his stake in Apple, which people were drawing conclusions from that, and the yen carry trade, of course. A lot of noise out there and I think people try to pin a reason onto a market movement and say, this happened in the market and it's because this, this and this, and it's not always that clear cut. But I'm curious as you and the team start to think about the fundamentals that are really driving high- yield bond performance over any significant period of time, put it in the context of all these factors that I've just mentioned. Maybe it's noise, maybe it's real factors, but how are you thinking about how that fundamental picture is shaping up today?

Kelly Burton: Yep, good question. So on the NFP print, which I think was one of the leading things that sparked the volatility we saw, it definitely was softer and we've seen some softening in that data. However, working with our economics team, it's important to look at the historical context and 114, 000 jobs is actually not out of the realm of historical norms. So it's very possible employment is just beginning to normalize and slow down, which is effectively what the Fed has been trying to accomplish. So when we saw that going on, it felt like this was all a bit overdone, and I think we're getting confirmation of that with some recent bounce back in the broader markets, so that's good to see. Again, other factors like in the equities, how soft those were, we were starting from a point of really lofty valuations in those large mega cap tech type names already.

Greg Campion: Yeah, yeah.

Kelly Burton: Again, those are not representative of the average high- yield company.

Greg Campion: Right.

Kelly Burton: It's kind of a different index you're playing in altogether, so again, doesn't necessarily carry over. Of course, we're always going to be watchful of macroeconomic data and I do think the market's going to be pretty maniacally focused on upcoming data points with regard to employment, inflation, et cetera, and so we will be paying attention to that, but it all comes down to the individual companies we're underwriting and what we're putting in portfolios that matters to us.

Greg Campion: Mm-hmm. Mm- hmm. I mean, in the US at least the consumer drives something like 70% of GDP. You mentioned the big tech stock names and I think there's been a lot of rhetoric out there around whether that AI trade has gotten ahead of itself, and if you're seeing some of that gloss come off that. Maybe, maybe not. But if you think about, bring it back to what's actually driving the earnings that you're seeing. I mean, coming through earnings season here, it'd be interesting to hear what your overall take is on earnings, and maybe if there's any other factors that you're watching like the health of the US consumer, it'd be interesting to hear about that.

Kelly Burton: Yes, so right now we're approximately two thirds or so through the earnings cycle for our high- yield companies. Q1 was a really robust period and the outlooks at that time were pretty rosy too. Looking at Q2 right now, about two times as many companies are beating expectations as they are missing, so that's positive. I would say outlooks are becoming more balanced overall. The first part of earnings, it was pretty bullish, it's becoming a little bit more balanced. Some are missing or pulling back their guides a little bit while others are holding in just fine, so it's sort of even- steven I'd say on that point. In terms of the consumer itself, if we're looking soft spots out there, that is an area of focus for sure. I mean, we've been hearing broadly that the lower- end consumer has definitely been entering a bigger level of stress. You've had all that COVID wave of stimulus really pushed out through the system. It's gone now, but as you mentioned, the consumer drives so much of GDP and that's really driven by the upper income bands. While the consumer is bifurcated in aggregate, it's quite strong and consumers have really been spending through this inflation cycle and overall looking pretty good, and so that's still working overall. There are some areas of high- yield though that are showing some signs of strain, or at least coming off the hot tempo they were at before.

Greg Campion: Yeah.

Kelly Burton: So, areas like retail. We're seeing some sequentially softening in things like leisure travel finally, as well as we were talking yesterday in one of our meetings with our automotive analysts, so automotive manufacturers are seeing inventories rise. So again, areas where there's real consumer discretionary spend you're definitely seeing softening, and so we need to take that into context when modeling out our credits in those areas.

Greg Campion: Okay, that makes sense. Now if we do see an economic slowdown or recession here, and I think the jury's really still out, I mean, I would say despite the fact that we had a few days of the market being really spooked, I think a more balanced view of things, we'll show you that the data's actually probably a little more on the neutral side. As you've kind of alluded to already, there's some positive metrics and some negative metrics out there, but if we do kind of head down that path toward economic slowdown, maybe recession, what do you think that could mean for defaults in high- yield?

Kelly Burton: Yeah, on the default point, right now we're sitting at a very low level. So right now we're around 1% or so of a default rate, and even including distressed exchanges we're sub 2%. Over the last eight months or so, the default rate has actually been coming down seven out of those eight months, so I think we're at an 18- month low point at this point in time. Looking ahead, the next few months should benefit us, because we had a decent chunk of distress type activity in the back- end of 2023, so that will be rolling down. So again, near- term feels pretty manageable. Another way we look at forward- looking defaults is the distress ratio of the market, so around 4% to 5% of our market's been trading at a spread level that's at 1, 000 basis points or more. So effectively, what is the market already pricing in as areas of stress that we need to be worried about or maybe facing near- term maturity problems, potential distressed exchanges to come. Historically speaking, let's call it half or so of that distress ratio may reflect default activity over the next 12 months. So take half of five, that's 2. 5%, all of this feels very manageable in the context of a long- term default average rate that's in excess of 3% or so.

Greg Campion: Yeah, okay. How do you feel about... because my sense is that with defaults in high- yield, they're not often popping up out of nowhere, right? Usually, as you kind of indicated, you see that stress in the market coming quite a ways ahead, usually rating agencies are making downgrades, et cetera. Do you feel like you and the team are well- positioned if we do see a spike up in defaults, which it doesn't sound like that's really your base case, but do you feel like you and the team are well- positioned to avoid those really troubled names?

Kelly Burton: Yes, I think so. I think part of that has been our positioning within portfolios. Frankly, we've been more up in quality than we have been in past years, because there's been a lot of great opportunities within BB credits. BBs are now the majority of our market, something like 52%, 53%. CCCs are only 10%, 11% of the market, and if you go back a decade ago, that was closer to 20%. So, a lot of risk has already come out of the market just from the composition of our asset class changing. So because we have been more up in quality, more performing high single Bs, low BBs, frankly, we've even invested in some BBBs in our high- yield portfolios, because they've screened pretty attractive in relative value compared to some of the BBs over time. So, that positioning behooves us when the market does dislocate. It allows us at times to begin selling those names that are tightest and moving down a bit into getting some of the yieldier names, but credits that we still feel fundamentally strong about.

Greg Campion: Yeah, yeah.

Kelly Burton: You're right, the market has already sniffed out the troubled spots, and this is where you've seen liability management exchanges, so a number of LME transactions have already occurred over the last year. Certain names that are larger capital structures are already ongoing with discussions between management teams and bondholders in order to affect creative exchanges or new money deals that enable the company to extend runway gain time to improve operations.

Greg Campion: Mm- hmm. Mm-hmm. Yeah, I feel like that LME discussion is a whole separate one. We probably need to do a whole podcast on that, 'cause that's such an interesting topic. I know there's different views out there in terms of pros and cons of what's happening there, but I think I've discussed this with Brian Pacheco when he was on the podcast and he was just talking about the importance of really having a big platform and being a big player in the space, so that you're in a seat of influence when these liability management exercises are going on. But yeah, I mean, it's really interesting that extending the runway, as you said, and perhaps some of these companies find it easier if we do end up in a scenario where the Fed takes rates down a bit and it gets easier for some of these companies to finance their debt, but that remains to be seen. But put a pin in that for now, we'll come back to that. We may have a LME- specific episode in the near future.

Kelly Burton: Okay.

Greg Campion: Well, with all this talk of recession anyways, we may be putting the cart before the horse, because the market is well- known for predicting something like 10 out of every two recessions, but really it's my understanding that high- yield performance tends not to be overly reliant on strong positive economic growth anyhow. But I'm curious, is that your sense too?

Kelly Burton: I think that's fair. In our market, what we care about is the ability for an issuer to manage its capital structure, be able to service its debt, and so it all comes down to the cash flows of the business. High- yield credit can work in a slower environment. As long as they can maintain their margins and they generate that cash we need, as long as credit profiles are in a healthy position, that's all fine. We don't need massive growth. Sometimes what you see on those big macro prints don't necessarily translate into ultimate returns, and I think the European market especially has proven that out over the last decade. So in the majority of years, over the last 14 years or so, US GDP growth has definitely exceeded that of European growth. They've had more periods of stagnant growth, but that hasn't translated into which market has done better. The European high- yield market, in fact, on a hedge basis has outperformed the US market generating better returns. So again, it doesn't necessarily dictate what you're going to see in an asset class's return profile just based on what the broader economy is doing.

Greg Campion: Yeah, that makes a ton of sense. Yeah, I mean, that actually reminds me of a chart I think I've seen in your team's pitch books before that just shows historical performance of the core four asset classes, so US high- yield bonds, European high- yield bonds, US loans and European loans. It is really interesting to see that chart year by year, because you would think that high- yield is high- yield, but the reality is, and I think a lot of times it's market technicals that are driving the differences, but it's really interesting on any given year to see US high- yield may be at the top and European high- yield may be at the bottom, and the next year it's flipped around and there can be substantial difference. So, I think that kind of speaks to the importance of getting a broad exposure across the whole high- yield universe, I think.

Kelly Burton: Yes, and it's especially relevant for our global strategies or those multi- asset credit portfolios that can go in all of those places. I think a great example of that was looking back in September'22 when we had the UK LDI, the pension crisis. So you had something very narrowly focused and specific to the yield's market, but it kind of bled into broader European high- yield in terms of how it was trading.

Greg Campion: Yeah.

Kelly Burton: It was just more fearful and so spreads were really gapping out in the market, and as a global team and high- yield, again, it's grown up a lot. We have a lot of large global scale issuers that print debt in both Euro denominated debt as well as USD currency, and so we have a number of, for instance, secured bonds in both lanes, and so we can compare them on a day-to-day basis with relative value. Now fundamentally a secured bond at the same issuer, same part of the capital stack, fundamentally it should be priced the same, but in these cases where you have a real market dislocation and a real technical push wide, we saw equivalent Euro debt trading 200, 300 basis points wider than the exact same maturity, again, same secured level of the capital structure than that US bond. So we were able to sell the US bonds, rotate these portfolios more heavily into European debt and knew that over time this would level out.

Greg Campion: Yeah.

Kelly Burton: That's exactly what has happened, and so a lot of our alpha in recent periods came from some of those European shifts, and not being afraid of the broader noise that you're hearing out there and going bigger into that currency in terms of the debt. Now again, in our global strategies we're not taking currency risk, everything is hedged out, but this is just sort of a like- for- like basis on looking on where spreads are gapping, and you've seen that play out even through 2024. Coming into the year, European bonds equivalent, again, to their USD counterparts were maybe trading 75 basis points or so wide, now they're only about 30, 35 basis points wide. So that, again, has normalized, but sometimes it just takes time to play through.

Greg Campion: Okay, yeah, that's really interesting to hear. I mean, it seems like over the long- term it's definitely fundamentals that are going to drive performance for this market, but in the short- term there are these market technical factors, whether it's flows in or out of the asset class or other technicals that seem to drive these short- term opportunities, basically market inefficiencies, and it's really interesting to hear how you and the team are taking advantage of those. Not to make this too much of a Barings commercial, this is a Barings podcast though, but it does kind of reinforce the idea of why you need to have a large global team, people on both sides of the Atlantic, et cetera, and really kicking into the nuances of all these credits, because these types of opportunities open up, they don't last forever and you need to kind of jump on them. So, I love that example. Okay, another risk, and I hope I'm not being too negative in this podcast, but another risk that we hear people talk about is the so- called maturity wall. Is this something that's on your radar and that you and the team are worried about, monitoring?

Kelly Burton: Yes, if you go back again, 2022, 2023, the markets were more closed, so there was a heightened concern for any near- term maturities coming due, what was the ability of those issuers in terms of being able to refinance. That story has really changed, and coming into the year we saw shorter maturities as more of a opportunity than a threat. We now have about 22% of the market that's coming due over the next three years, and about 12% of that is actually BB rated. So again, a large part of our market being really strong in quality, we're not going to have any concerns of those issuers being able to refinance. Even if the market really quiets down, it's just going to be a function of where is the CFO willing to print the new debt. So you really have to be more concerned about the smaller CCC riskier credits, which is a pretty small component of that maturity wall. So we were able to buy coming into the year, much of the year a number of names with shorter maturities, call it 2025 to 2027, at discounts to par. You just know these are going to be pretty easy pull to par stories and generate some nice returns without taking excess rate risk,'cause obviously the longer you go in duration on the bets you're making, then we are going to be more susceptible to the whims of how the market is pricing in future rate cuts.

Greg Campion: Got it, got it. Okay, I'm going to hit you with another knock on the asset class. This has probably been the biggest knock that I've heard this year and that spreads are tight. It's not really just specific to high- yield, we've heard this in EM debt and in other asset classes. IG's even been trading really tight for most of the year. What do you think about that? So as you look at that, I mean, I think there's a view out there that, yeah, a lot of the juice has been squeezed out of high- yield because spreads have been so tight. I'm interested in hearing how this recent bout of market volatility has influenced that picture, and just generally how you're thinking about where credit spreads are today.

Kelly Burton: Yes, so spreads have been in a low percentile basis relative to a long 20- year type history. There's no doubt about that, but what has still been working for the market and why you've seen flows come in, yield buyers, yields remain pretty attractive, as well as that short duration part that I mentioned earlier. So if you're able to get into an asset class in a low three- year type context and still get a 7. 5%, 8% yield, I think that screens pretty well. The other thing that I mentioned earlier that is atypical for our market is being at the price discounts we've been at. So we've been in a low to mid- 90 cents on the dollar context, and generally we're operating in a par plus context in high- yield, unless we're in a recession, which we clearly have not been in yet. So, all of that has worked for buyers in high- yield. Now, today, again, we've had some recent volatility and it looks like spreads for a couple days there gapped out by as much as 70 basis points or so. With the last couple days of trading activity, we've maybe clawed back half or so of that-

Greg Campion: Okay.

Kelly Burton: ...so on the valuation argument, it has gotten a little better. On the spread context, we are closer to year- to- date wides than year- to- date tights. Frankly, this has gotten things more interesting, because what was really also unusual about a market is just how long we were operating in a prolonged period of low vol and spreads that were just bouncing around the same 20, 30 basis point range-

Greg Campion: Yeah, yeah.

Kelly Burton: ...so things were just not loosening up. Again, we kind of like these pockets of volatility, especially if they don't just last for a day or two where we can get a little more active and potentially repositioning in some things.

Greg Campion: Yeah, makes a ton of sense. I want to come back to something you mentioned at the beginning, and that's that you manage our global senior secured bonds strategy. I'm not sure that senior secured bonds is a very widely understood part of the market. Can you just kind of define that and then maybe just tell us a little bit about what it is you like about senior secured bonds?

Kelly Burton: Yes, so we like senior secured bonds, because they often give investors the same yields and spreads, it's just the broader market. But what makes secured bonds special, it's effectively like a leverage loan, so we get collateral on the underlying assets that we're underwriting. So that means if you do get in a troubled situation with an issuer, if you ultimately go through a default situation, you're going to have higher recoveries than you would as an unsecured or subordinated bond lender. The other thing we like about the asset class, this component of the asset class by the way is call it a third or so of the broader market, so it's just an interesting, unique subset.

Greg Campion: It's a subcomponent of the broader high-yield bond market.

Kelly Burton: Correct, correct. So, in all our portfolios we have a portion of our bonds embedded in secured bonds. So those are all the reasons we like it, as well as it's exhibited better volatility metrics than the broader market, and so we reflect those best ideas within the secured bond strategies throughout our portfolios, frankly.

Greg Campion: Okay, okay. Now, you mentioned that senior secured bonds are collateralized. Can you help explain what that means?

Kelly Burton: Of course. So it depends on the kind of company that we have, and it can be intangible or tangible in nature. Tangible assets are a little easier for us to envision, because it can be a company that has literally widgets and plants on the ground and we potentially have the security on all those assets.

Greg Campion: Yeah.

Kelly Burton: But for companies that may be tech- oriented or media- oriented, that could be around the software, the IP, the trademarks of the business. Essentially, what is the most valuable component of the business that we as lenders can own.

Greg Campion: Yeah.

Kelly Burton: I think a really great example of the kind of collateral that we've liked actually came out of the COVID crisis, and speaks to why we even like operating in pockets of volatility too. So American Airlines came to the market in June of 2020, and if you might recall, nobody was on a plane in June of 2020.

Greg Campion: I remember, I remember. I had our third child in April of 2020. I remember exactly what was going on then, yes. Yeah.

Kelly Burton: So, these airlines were just burning cash and that was a scary period of time and a lot of investors were not willing to look at any airlines at that point in time.

Greg Campion: Yeah.

Kelly Burton: But American Air, that was a really solid credit in our market. We did a lot of work on this and we felt like while there was uncertainty around this pandemic, it would be temporal in nature. At the heart of it, this is a really good company that should ultimately come through it as long as they can manage through this interim period of stressed cash flows. So we were willing to lend to this credit, but in exchange for that we got a really juicy 11 and three- quarter coupon. It was for short maturity, 2025 was the maturity date, and we also got collateral on valuable routes, slots and gates that the airline operated. How we knew they were valuable, there was a third- party appraisal that was done on that that showed the debt that we were lending to the company was going to be covered multiple times over. So again, a difficult time to invest in that space, but we felt like this would work out, and ultimately it fortunately did.

Greg Campion: Yeah.

Kelly Burton: So for three and a half years, we collected our 11 and three- quarter coupon and it was taken out early,'cause again, the company was incented as soon as they got their feet under them to get rid of high coupon debt like that. So they took it out early at what's called a make- whole price, so it came out at over 110 cents on the dollar. So, that was a really solid example in the kinds of assets that we could get. Fortunately that never did go bad, but if it got into more of a default distressed scenario, we could ultimately be owners of the routes, slots and gates.

Greg Campion: Yeah. Yeah, super interesting. Now, the companies that are issuing secured bonds, are they usually companies like American Airlines where it's generally a solid company, but they're going through this period of difficulty? Or are there a ton of different reasons why a company might issue a secured bond?

Kelly Burton: Yeah, good question. The whole market was kind of born out of the financial crisis, in fact, so the bank market was pretty shut to issuers, and this market of secured bonds really began opening up, because bondholders were willing, again, to lend to the company, but in exchange for collateral just like a leveraged loan lender. So yes, COVID was definitely another stress time in our market where we saw heightened activity in the secured bond space. Even over the last year or so when the markets have been much quieter, we've had a higher proportion of bonds come in the way of secured bonds. This year, I think we're running 40% to 50% of the market, and again, historically that's probably more 25%, 30% of the market comes in the form of secured bonds. So there have been more opportunities as markets have gotten dicier, but again, there's still a lot of different companies that make up that.

Greg Campion: Okay.

Kelly Burton: Some are going to be smaller in scale, lower B- rated credits, but there's still a lot of well- performing solid single B, solid BB credits that are in the secured bond universe.

Greg Campion: Okay. Are companies usually looking at other routes? Are they looking at, does it make sense to issue a senior secured loan or senior secured bond? Or maybe they do both sometimes? I'm just curious, how would a CFO make that decision? Is that whether or not they want fixed or floating rate debt, or how does that work?

Kelly Burton: Yes, I think that's definitely a part of the decision- making process. We do have a lot of companies that have both secured bonds and loans and even unsecured bonds. Again, all flavors, Euro, USD,'cause again, we have lots of large companies that comprise high- yield now. Especially since we've recently been in this higher for longer environment, there was more uncertainty I think around inflation, where rates were going to go. You probably had some companies that were more willing to step in and begin fixing more of their debt, because the floating rate product was hurting them in terms of the interest cost.

Greg Campion: Okay, and you mentioned earlier that you and the team sometimes see these relative value opportunities between Euro- denominated debt versus USD- denominated debt. Do you see any of that relative value even among the same issuer between a secured and unsecured bond? Or is that not really-

Kelly Burton: We monitor that as well over time, how much essentially are you getting paid extra to go down in the capital structure. Unsecured bond to secured, obviously you're going to get a ratings differential as well, and so depending on what portfolios we're working through, if that unsecured piece is a lower B type rating or maybe even CCC, that might be a little more off- limits for more of our conservative investors. But for those total return unconstrained accounts, if you're getting a really nice pickup in the right coupon to move down the capital structure, then we're certainly willing to do so. It's usually about underwriting the entirety of the business, the full amount of leverage that the company has to withstand, because we're not going to love it if they are just good through the first part of the capital structure, right?

Greg Campion: Yeah, yeah.

Kelly Burton: That means something is got to go really right for them in order to service the whole thing.

Greg Campion: Got it. Okay, cool. All right, for our listeners who are interested in senior secured bonds, Kelly and team have written on this subject before, so go to barings. com. Under the viewpoint section, you can find our content there and learn more about it, but thank you for giving us that little taste. I think it's a probably less well- understood or recognized part of the market, that it's really interesting to hear about.

Kelly Burton: Yeah.

Greg Campion: Okay, we're going to finish up with a really easy question just about the US election, so it's not controversial or anything, so it should be really easy. Yeah, curious, obviously we're in the run- up to the election here, it's on everybody's radar. How are you and the team broadly thinking about it, specifically within the context of managing high- yield portfolios through this election cycle?

Kelly Burton: Yeah, this is a tough one. Really hard to know the outcome of this election at this stage. We've obviously had a lot of headlines here over the last month with regard to Biden withdrawing, Harris stepping in, someone trying to assassinate our former President Trump. So, it's been a wild ride and I think is honestly probably factored somewhat into the volatility we've seen in the markets, so uncertainness to resulting credit impacts. I think what we've learned through historical election cycles is that often you do get some level of volatility around the uncertainty, but that it'll settle out once we get on the back- end and we know who's there. I also think it's less about the individual who gets the role of president, it's much more about the congressional elections too. So if we remain in a split government, that's really going to mute the effects that any one individual person can enact. So I think it's much more about watching for a blue wave or a red wave, and from what I'm seeing so far, which again, pollsters don't necessarily have all the answers either, but it seems a little more difficult to envision one of those real sweeping scenarios. I know our economics team here as well has spent a lot of time talking about both sides could honestly be somewhat inflationary from Biden's perspective, and we're early in on learning about Harris's policies and how they may differ somewhat, but I think it's fair to think it could be similarly aligned with Biden, maybe slightly more progressive. But on that side, we've had large fiscal spending programs in the context of full employment. Then on the side of Trump, worried about tariffs, taxes, so again, either side I think could result in larger budget deficits over time. So again, from a macro perspective, it's important to consider that. Now when you get down to the individual levels of companies, the areas we'll be focused on will be regulation, taxes and tariffs. So something like tariffs, how's that impacting a retailer that is sourcing goods from China, that's going to really play through. Maybe some of the high- level of tariffs that are being bandied about in the press, maybe that's not ultimately where they land anyway, right? So again, uncertainty around that. Regulatory environment, we usually feel like on the Republican side, that opens up the door to more M& A potentially, so that could affect all kinds of industries. But we're going to have to take it step by step on the credits and the sectors, and it is why it's important to have a team of analysts that can go deep in their industry silos knowing areas that honestly have neutral impacts. Things like cable and telecom, both sides of the aisle have been supportive of building out rural broadband, okay, so that's fine. An area like automotives, EVs, that might get more of a pullback in terms of subsidies, tax credits if Trump were to come in, but frankly, the manufacturers have had a hard time being profitable in that space, so anything that pushes that further to the right is honestly positive for some of our credits there. So again, every sector's going to react differently and we're just going to have to monitor it as we come, but we're keeping our eye on it like everybody else.

Greg Campion: All right. All right, well, that was a very rational and level- headed answer to terms that are not usually associated with politics. So no, that's interesting to hear how you and the team are thinking about it. It's not like a red basket of credits and a blue basket of credits-

Kelly Burton: No, that's not how we're curating.

Greg Campion: ... and it breaksone way or the other. Yeah, it's very much kind of credit by credit. Let's look at all the different many factors that could be influenced, yeah. Okay, well, it's something we're all going to be watching, and so we'll be talking about more this year, and I'm certain it'll be factored into our 2025 outlook when we're doing that.

Kelly Burton: That's right.

Greg Campion: Okay, cool. Just wanted to finish it up here and just ask you, you've been operating in this market for a long time now, so you've seen periods of volatility, you've seen ups and downs in market cycles, recessions, the whole nine. So as you zoom out a little bit, political administrations, so as you zoom out and you just think, okay, if I'm speaking with someone who's got an allocation to high- yield today or considering one, is there anything you would want to leave them with given all that context that you have?

Kelly Burton: Summing up all the points we've sort of hit on, technicals, those really remain supportive of the asset class. Fundamentally, we acknowledge things may be deteriorating a bit as you go sequentially through the year, but we're starting from a really solid footing. Leverage and interest coverage ratios remain quite good and better still than historical standards, so not too concerned from that standpoint. Again, valuations have improved somewhat. We've had some interesting volatility in the markets which have gapped out spreads, and if it subsists for some period of time, we might have more opportunities to really continue to double down in some of our higher conviction trades at even better entry points. So, I think all that, again, is working in the favor of high- yield. It is just important for any client or potential client to know their manager has a lot of resources dedicated to this market. It is inefficient, like you mentioned. We need to be able to scour the entire landscape as we're seeking out the best risk- adjusted returns.

Greg Campion: Great. Well, thank you. This has been really educational update from my perspective and very timely as well. So again, I appreciate you braving the weather and same to the crew. Thank you all for-

Kelly Burton: Happy to do it. Yes, thanks.

Greg Campion: Yes. Yes, I was thinking the word streaming and streaming income could have dual meanings today, but so far I haven't seen any leaks in the windows, so hopefully it stays that way. But seriously, this has been awesome. Really appreciate your time and hope to do it again sometime.

Kelly Burton: Thank you.

Greg Campion: Thanks for listening to or watching this episode of Streaming Income. If you'd like to stay up- to- date on our latest thoughts on asset classes ranging from high- yield and private credit to real estate debt and equity, make sure to follow us and leave a review on your favorite podcast platform. We're on Apple Podcasts, Spotify, YouTube, and more. If you have specific feedback, you can email us at podcast @ barings. com. That's podcast @ B- A- R- I- N- G- S. com. Thanks again for listening and see you next time.