Riding the Momentum in Credit

Published on
September 25th, 2017
35 minutes

Riding the Momentum in Credit

The Interview ·
Featuring Jeff Kronthal

Published on: September 25th, 2017 • Duration: 35 minutes

Jeff Kronthal gauges the status of the credit cycle, based on his 40 years’ experience in the markets, as the extended economic recovery continues and corporate debt climbs ever higher. Identifying how much further we have to run, Jeff also examines the impact of beta products like ETFs on credit and rates, as well as the opportunity in European CLOs. Filmed in New York on September, 11, 2017.


  • TA
    Tahsin A.
    2 July 2018 @ 00:58
    Goodness - I just joined RealVision yesterday and this interview is amazing ... he got pretty much everything spot on - long vol, short IG spread, low deafult rates (hence low HY spreads) , trade worries, .... would love to hear his thoughts now ...
  • MD
    Mathieu D.
    27 September 2017 @ 20:21
    Another great one. Glad to see more credit focused interviews here. I didn't quite get how the cov-lite kept the number of defaults down in the CLOs during the GFC. "where you see issues with companies who you know are going to default in the future but they aren't being triggered, and they have a little time to work through, it actually can decrease the amount of defaults." Anyone got that? I would really want to understand this one. Thanks
    • CL
      Cyril L.
      2 October 2017 @ 10:53
      Take 2 companies with 100 of EBITDA and 500 of debt in year 1, and an EV of 9x EBITDA. One has a max leverage covenant at 6.5x, the other is cov-lite. When the cycle turns in year 2, both companies see their EBITDA decline to 70. Valuations are depressed so both are now worth 6x EBITDA. Leverage is now 7.1x for both, so the debt is not covered. The one with the leverage covenant defaults since leverage has gone above the threshold, the other one doesn't (assuming they have enough cash to muddle through year 2 and long enough maturity). There is a recovery in year 3, EBITDA for both go to 90 and valuations improve to 8x. The second company's debt is now covered again (leverage being now 5.6x) so it still doesn't default. So even though the trajectory was exactly the same, outcomes are different. That's oversimplified, but that's basically how cov-lite can lower defaults. On the other hand, assuming there is no quick recovery and the second company ends up defaulting later (due to lack of cash or debt coming due while still under water), there is a risk that recovery will be lower given that the lenders haven't had the opportunity to step in earlier and influence the strategy towards maximizing debt recovery (in such situation PE sponsors have an incentive to take more risk than lenders would since they're further out of the money and it is now a free option for them). There aren't that many data points though since cov-lite was less prevalent in prior cycles, so the fact that cov-lite lowers recovery is an assumption more than a proven fact. Since the vast majority of leveraged loans are now cov-lite, the next credit cycle should provide much more data to understand the full impact of cov-lite.
    • MD
      Mathieu D.
      21 October 2017 @ 13:06
      ok got, thanks for the explanation Cyril L
  • OB
    Olivier B.
    1 October 2017 @ 04:06
    How can individual investors access the CLO space to invest in?
  • PP
    Patrick P.
    29 September 2017 @ 08:24
    I thought Bill was outstanding as an interviewer....very well prepared. Didn't try to insert his views.
  • RA
    Robert A.
    25 September 2017 @ 23:23
    Nice balancing by RV again with a fairly positive credit outlook by a gentleman who has the gravitas to render the opinion (great job by the interviewer, IMO). I'm struck by how the Reinhardt & Rogoff seminal "This Time is Different" scenario of low interest rates and low growth continues to play out. I never really understood why the R & R data through so many aftermaths of credit blow ups was so one sided to the low rate and low growth side. Someday we may figure out the "why" (other than just too much debt), but it sure seems like R & R may have nailed it for this cycle as well.
  • JH
    Jesse H.
    25 September 2017 @ 22:45
    Interesting and enjoyed the last part of the interview particularly. In the context of a "safer" banking system, yes from a regulatory point of view -- would probably agree here. However, we need to look at the whole system, not just the banks. When you look at Fed and government "leverage", we effectively have a sadly insolvent and over-leveraged system...the nexus of the leverage has just shifted, that's all. With respect to the QE discussion, one reason I think we've had a slower recovery post 2008 in the US is that you have to look at WHERE the money went -- it went to financial actors who, surprise, surprise, did not put the money into the real economy, either held it to shore themselves up in light of new regulations or put it back into the financial markets. Hence rich people paying absurd sums for art on NYC and overpriced apartments. We have definitely had inflation, it has just been localised to the markets where those who profited most from QE put their money. If the Fed had instead distributed a public dividend across every household in America, we would have seen a very different distribution of the "recovery" but also perhaps some inflation. Not sure that would have been significantly better, but hard to say.
  • HJ
    Harry J.
    25 September 2017 @ 19:03
    What about the corporate debt refinance looming?
  • VK
    Vladimir K.
    25 September 2017 @ 11:48
    Good, deep insights. Will rewatch in some time. Thank you, Jeff.