High Yield Masterclass | November 2018
- 45 mins 44 secs
High Yield Masterclass | November 2018
Investors are hungry for income, but as interest rates start to creep in in the United States, will that hunger remain in place for high yield bonds in particular? Discussing on the panel are:
- Thomas Moore, Fund Manager & Senior Credit Analyst, Invesco
- Barry Cowen, Senior Fund Manager, Sanlam Investments
- The impact of rising US rates on the global high yield bond market
- The outlook for debt issued by financials
- What new issues reveal about the state of the high yield market
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It may contain errors and omissions.
Hello. Investors are hungry for income, but his interest rates start to creep up in the United States. Will that hunger for high yield bonds in particular remain in place? I'm Marco. This is master class. We'll discuss it. I'm joined here in the studio by Thomas Moore. He is fund manager and senior credit analyst, had Invesco on by Barry Cowan, senior farm manager at San Investments. Tom, we're talking tail end of twenty eighteen. What sort of a year has high yield had so far? Has been a bit of a tricky year? To be honest on, particularly the last couple of months, we've had periods from January through September of strength and weakness in the market. But October November have been really very challenging for all risk assets. So we've seen a pretty decent backup in spreads. Yields are at the highs of the last several years bond. So it's been a bit of a bumpy ride, but at the same time that opens up opportunities that weren't there before. So if you started the year in January of one hundred nine hundred ninety eight, depending on depending on how well you've navigated it, in which part of the market urine, you're probably down three four percent, maybe you maybe you're a little better off than that. But essentially what's happened is that the income that you've learned over the course of the year has cushioned you from thie the reductions in capital prices. But not entirely. Thank you, Barry. It sometime. You're buying funds on behalf of clients. How are you seeing high yield we've been underway for most of the unfairly meaningful. So the backup in yields over the last few weeks of giving as an opportunity to go in. And we've recently raised exposure in particular to short data high yield way. We've got less interest rate sensitivity, but we've got that carry that is now quite appealing. Oh on what are you using high yield for in your book? It's part of our fundamental framework, so we've usually gotten exposure to it. But in particular, as we run a combinations of bonds and equity predominantly as high yield actor something of ah, hybrid between the two. In terms of the way it performs, it provides a great stepping stone. Francis. We moved between bonds and equities, risking Andy risking the portfolios so we don't have to go all out of equities all into bonds. We can go halfway house, that sort of high yield office now. One thing a lot of asset allocators saying at the moment is we've been through this period where equities and bombs have gone up together and his twenty eighteen been the equities and bombs go down together. If so, why do you want an asset that sits between the two. What sort of correlation? Wade rather have cash in some ways, if that's goingto happen. But of course, cash doesn't yield you very much. So the question is yes, they may become correlated. But if the the fall in the asset prices is modest, let's say one or two percent. Whilst earning a yield of six, six and a half percent, you can still potentially get a net game that looked less attractive with the start of the U. N. Perhaps fields were four and you were risking a four percent loss. Spreads were tight, but spreads of widen out. You can now get a six and a half percent yield on high yield bond fund for a volatility of about four or five. Best go UK equity fund has about twice the volatility and is unlikely to give you twice the return, so risk adjusted it doesn't look bad on, hopefully over time is long term investor. You'll get the benefit of that six and a half year old. It's quite attractive income, but six, six and half field. Is that about? That's about what? That's what about what your were yielding at the moment. It depends a little bit what marketing currency you're talking about, because, of course, base rates are higher in the US, lower in continental Europe. But, yeah, Andi, I think Harry's right highlight thie income potential of the asset class at this point in time that it's the sort of income that's very difficult to access in other markets. And as I said a moment ago, it gives you a good deal of cushion about against that asset volatility and looking back over time. I's a six percent sixty percent yield on high yield par for the course of the last twenty years. It is a generous it, you know, it really depends what sort of a rate regime you're talking about, so that six and a half percent in sterling terms equates to a spread of about five hundred five fifty over base rates. That's not unusual, but we've come from a place where spreads and yields were very, very tight, very, very low for quite a long time. We're getting into what I might call a more normal environment. But obviously if the base rate goes up, then yields will probably go up, too. You mentioned the THIE yield about six percent. But given both rates are very low, why would accompany wantto borrow money six percent well, that high? If it could get itself aerating and borrow it a two percent three percent? Well, I think the answer to that question is that these are companies that don't have the option. And so if you look at the high yield market, you've got everything in there from big household names, the likes of Tesco that do actually borrow it quite a lot lower than that average yield. And then you've got companies that maybe because their balance sheets there really a good deal more stretched or they're smaller, or they operating riskier, more cyclical markets where if they come with a bombed, it's going to be more nine ten. We hold a portfolio that's a mix of all sorts. Very quickly, honest. You got Tesco or some tests in the top ten. Is that high yield better Tesco or yield a balanced well, so in fact, Tesco has been an interesting story because it was once upon a time, you know, a very stable investment grade company and through a series of, shall we say, strategic as well as financial missteps. The company ended up getting over stretching downgraded TA High Yield. It's been on a long journey back to investment grade over the last several years, and in fact, one of the rating agencies has just upgraded it. So it's something that we've held throughout that journey. That's a position that will probably has the story plays out fully drop out of the portfolio. It's like a sort of convergence plan the nineteen nineties with Italian government bombs as they headed towards the German Once. It's sort of the corporate version of that Well, given the backdrop. I mean, we're hearing a lot about Brexit, all this uncertainty of the economy. If one of your investors given that uncertainty, what? Why do you want to go on lend money to higher risk? Cos how confident do you need to be safe and secure? Many of the companies armed British companies aren't European. They often are global companies that maybe borrowing in sterling or dollars on hedged back. So by going to a global high, your manager you don't have to have exposure on ultimately becomes down tto the capacity, the ability of the manager themselves to go and pick businesses that are insulated to an extent from those problems On DH, we go try to choose managers that will do exactly that in the sense that will help you navigate through that with minimal default. But yes, plays on Investorsminds. But that's what creates the opportunity. At the start of the year, we won't have a happy getting involved. Four percent. We didn't think we were being adequately compensated, but it's six, six and a half percent investors of being more compensated. I mean, the two other points is that borrowers were happier borrowing it, for they're going to be less happy. Borrowing at six and a half. That hopefully means a little less supply into the space. Um, that gives us a better risk reward characteristic for us. You're looking at higher bond funds is part of your research process. How competitive market is it? It's it's getting more competitive. I don't think it was a hugely competitive market years ago, but there are now farm or in the space on DH. There's a wider variety to choose from. You've also got a lot of strategic bond fund managers entering the space. Many strategic bond fund managers have been heavily exposed to high yield over the last two years, supplementing duration for income in the high heeled space for a turn, if you like. So I think it's it's actually almost not that is your pure high heeled fund, but there's a lot of strategic bond. Fund managers will have sixty seventy percent in high yield as well. And in terms of your fund, Tom, How global RU What? Where'd you go? Where you go? I was, so it's primarily a developed markets fund on DH. So the great majority of our exposure sits in the US, Europe? Um, and then, of course, the U. K. Within that, we do have a little bit of exposure to emerging markets, and that's primarily through emerging market corporate ce sir Cos that happened to be domiciled in a developing market, even though in many cases, their operations, their global and then there's a tiny sliver of sovereign debt in there, but it's not really a big part of the strategy. Why not have a bit more in emerging markets? Because we hear it's going to be the growth engine of the future. These markets are growing is not a natural development. Well, so I'd say that the M exposure that we do have is because we've seen specific opportunities there. If you're talking about the asset classes, a whole one thing that could be quite tricky is achieving the level of diversification within that area. Often you'll find that even jurisdictions that shouldn't be correlated with each other during periods of market crisis becomes so on DH. In any event, I think that it's it's something that's a source of Alfa for us on the margin, but not really what we're being paid to do. And very mentioned. There are a lot of strategic bond funds. We got a big exposure. Teo High Yield. At the moment, you can continue to have that ball. Do you see those those beginning to beginning to dial that down? Hopefully, if they find the place to find the sector expensive, they'll have dolled it down already. Um, but my suspicion is that they will dial it down further in future as rates go up and they get more scope to lengthen duration to pick up return via other areas of the bond market. Well, say I mentioned the instruction of the great Star began to rise in the states. You seeing any evidence that's beginning to drain liquidity out of the bomb? Marc, I would say it's not so much the rising rates that straining liquidity is the withdrawal of quantitative easing. So it's the rising rates in the U. S. Has been fairly orderly. WeII haven't seen a meaningful, increasing base rates in Europe yet, although clearly there's a bit of a difference between the UK and the eurozone. But what we are seeing is the impact on markets of the end of corporate on buying by PCB in Europe, or at least the tapering of that program and the withdrawal of quantitative easing. More generally, what that's led to is more volatility. Mohr, sharp price reactions and, generally speaking, just what you would expect when that big mattress of money is withdrawn. But when they went as that mattress of money as you put it comes out of the market, does not you? You mentioned volatilities. Do expect prices come down as well. It has been inflated up. It'll be deflect. Well, I think that's what I think. That's precisely what we've seen over the last college eight to ten weeks and I I don't know if there is further to run. So they have tapes. The mattress, the No. I think we're all we're all finding this out in real time. What I would say, though, is that Justus Barry highlighted it at the beginning of the year. It would have been impossible to say with a straight face, that there was a lot of value in the market. Now I think that I can look at the market overall and at certain pockets of market in particular and say, You know, this is now trading at levels that were interesting in absolute terms. Very. How liquid should investors expect there high yield exposure to be? I mean, you by funded steady price. But if he's there slightly smaller companies, if it's quite a volatile market, so I think within the market there's obviously diversity as well. There are some areas that are going to be farm or liquid than others, but also as markets evolve, that liquidity will change. I think liquidity isn't something they should take a given. In a sense, I think that's one of the reasons the asset class offer's attractive returns brings with it a liquidity premium. Many of the high yields we compared high yield bonds too high to equities earlier with volatility, and what have you on that extra turn is there because they're not as liquid as many of those equities on. The liquidity will dry up if there is a further credit card. If there is a nuclear crisis, I don't see a credit crisis coming. I think we've had that. But there are some concerns in the space, given some of the borrowing behaviour, perhaps going on in the loan market, when covenant light issues in these sorts of things have been going on. And I guess if there are rising defaults there, where some weaker borrowers have born a lot in floating rate debt, if you start seeing the faults there that could spill over into the market, that could cause liquidity concerns. I think we've seen a little bit of that already. I think we could see more, but it's a long term investor. We encourage most of our clients to be long term. Investors almost tried to seize the opportunities that that creates again that will create opportunities, will scare people away. That's what we want that manages to seize upon know the difference when that when a product is trading an attractive level, take advantage of it. But that doesn't mean I'm going to pick up. A really important issue is what's the new issues market looking like the moment. What's it? What's it telling you? Well, if we've been having this conversation, call it a month ago, I think I would have said that we're not seeing a heck of a lot that we like in the new issue market that the quality of borrowers coming to market has declined versus a year ago, and the terms that we're getting are not as attractive as from lenders point of view as we would want. And so we're saying no to most of what we see after this period of re pricing and volatility that we've had really. It's actually only the better quality issuers that can access the market at the moment. And I think that if we see a continuation of the conditions that we've lived through over the last couple of months, will probably begin to see a little bit more iron come back into the contractual terms as well, because, you know borrowers will have to make compromises if they want asset managers to put money to work with them. What are some of the things that get written contracts that you think I don't? I don't want to be on the other side of that. If it goes wrong just to sing, Barry alluded Tio. This obliquely. Let's say traditionally, what you would expect is strict controls over What about Harken do with extra cash that's generated within a business degree to which it can be dividends to shareholders. For instance, provisions for debt to be repaid in the event that company's sold. Let's say pretty strict limitations on the degree to which a company can take on additional debt on DH. Those air all provisions, which I would say have been weakened in the last couple of years, It's not to say that they've gone away altogether. But you know, the terms have been softened that the edge, little by little. And when you're looking at hi, you bonds. Typically, how long people borrow the money for is this. Like the government's, Where they borrow thirty, forty, fifty years out is no taste to be much shorter duration fundamentally. But then, Also, a lot of high yield bonds come with cool features, which short duration potentially even further. Now, obviously, if there are borrowing into falling rates, you're more likely to get hit by that call. If they're borrowing with those core features into rising rates, you're less likely. So there's a hate set of Convexity, perhaps isn't going to be so helpful. With duration becomes longer, Azad rates rise, but generally they they tend to be relatively short. That, said, one of the useful features I think of having had zero interest rates in the developed world for most of the last ten years is that a number of quality issues high yield issue borrowers have taken advantage to term out some of their borrowing on. I guess if again, fund managers looking at that and understanding the need for the borrower to come back to the market in the near term provided the borrow. It doesn't need to come, then that's a good thing. They're not being forced to raise money into into our high rate environment. Aunt on, we can kind of sit tight. No question. I do want to put you in a second before what's what's the trash on your funding? It's right around four and a half years, which is pretty typical for the asset class. You have this category of funds that are run to super short durations of, you know, a year or less. But the asset class itself, a spirit, said he's a fairly short duration asset class by its nature. So depending on which index you're looking at, it will be anywhere from forty third toe for two thirds. And we're right in the middle of that right now. Question in which your life because it's all about Italy. Do you see any high yield opportunities in the Italian market? Given the current issues between Italy and the U? So the answer is yes. The whole Italian market has cheapened up, and Italy is our Italian corporate CE in general or big borrowers in the European market. I say it's a a bit of a split between the one hands. Very, very large borrowers. For instance, in the telecom space, Telecom Italia is rated high. Yield is one of the largest components of the European market there. You know, you're probably getting a hundred basis points more than you were earlier in the year. And so although the absolute yields aren't super high, it's still a lot more attractive than it was on DH. Then you've got a whole range of smaller companies, some of which are in their niche champions in their own right, and there because they're less well known. They're generally having to pay quite a bit more tomorrow and there. There are a number of names that we own that are, you know, almost Evergreen holdings within this market where selectively, we've been adding as prices have become more attractive, it's always it's quite interesting, I think that haven't been bomb market a number of years. It's traditional that an Italian corporate would be priced off the Italian government. But in the eurozone world is a more logical than an Italian corporate gets priced off. Ah, bones you're a eurozone rate of some sort of hybrid or should have continued to trade off a local government. And if it should trade off for local government, why? Well, I think it depends a little bit on the company, and the fact is that you've got, you know, to name another of the very large Italian corporates Fiat Chrysler. You know, a tremendously international global company where, you know, even in the very extreme scenario, weirdly drops out of the eurozone. I don't think that Fiat is going to be reading nominating all of its bonds into lira, so they're clearly to my mind, pricing off a building or some other eurozone rate is appropriate now. On the other hand, you know a small services companies that has none but Italian clients. Well, maybe they're the relationship with BT piece is a little bit more direct. But do you have I worry that the eurozone might have its existential crisis and someone like Italy doesn't grease if you like, but on a very, very big scale, Look, it's absolutely a possibility. But given the difficulty of the UK has had it leaving our suspects. Europe will do all that it can to keep it. Wanted for murder yesterday, and we're talking reminiscing about the wonderful days when he used to run the convergence trades on Europe. And then he sort of smile, Mr Think, years ago, about setting up a divergence trade funding, I could seem clicking, thinking this idea might might be coming back. Uh, what does that raise the issue ofthe currency and bring Thio brings it. I mean, how you can you hedge people against Brexit risking your portfolio? Well, what's been really noteworthy in the two years since the referendum vote is that although the bond market has been, the high yield bond market has been roiled bye fears about a messy brexit. It's really the currency has taken the biggest hit on DH. So if you're a sterling based investor, you can either not Hegel of your exposure to foreign currency that provides a new internal hedge within a portfolio. As it happens, partly by mandate and partly by choice, we hedge substantially all of the risk. But what you find is that so long as you steer clear of those actually relatively few cos that would be, shall we say, imperil DH by a messy brexit, then actually it's it's it's possible with a portfolio diversified portfolio, I think, to insulate yourself from the UK specific risks thiss whole process entails. What are the sort sectors or subsectors in the UK that get affected by a message? Brexit. Well, so how you staring? Also an example would be clothing retailers who source most of the product that they sell abroad, mostly in dollars or euros on DH, our operating on pretty skinny margins to begin with. Now we've got some exposure to that space. But what we've tried to go with is a subset of companies that have hedged their currency risk out substantially and that have been created and adjusting their supply chains to try and insulate themselves from this volatility. I know just what matter Lina's a top ten holding. So what? What's it done? So I would. I would be there there a terrific example of this. Madeline, going into the Brexit vote had probably the most comprehensive currency hedging program of any of the high State Street retailers that we follow. They also occupy a niche within the market there a discount clothing retailer, and they sell all their own brands so they provide a service that everyone needs. And in a time, in fact, when there's economic uncertainty and people are either feeling a pinch or maybe you're afraid of feeling a pinch they way believe would be well positioned relative to other retailers occupying other niches how far off they had become a problem again inside Twist so well, No, it's it's a rolling program, and so they hedge in a portion of their exposure. Actually, a couple of years out. Now, you know, it's not a it's not a steel suit of armour. You still have to navigate through things. It just gives you more time. But just in terms of exposure, generally not necessarily in high yield. How you playing, Brexit? Because I suppose, if you if you don't if you don't hedge and we get a hard brexit that actually that oversees exposures worth a lot more to your clients, they're going to want it. Yes. So how do you How do you marry that up with Wayne have balanced, diversified portfolios. It's interesting that through the Brexit vote, portfolios went up on many clients were I'm writing in asking us how were you positioned to defend against this and my diversify. In that case, it was the exposure to foreign currency equities bonds. That really helped, of course. Now, if we don't get a message brexit in the pound rallies, you might find those foreign holdings hurt. But we've got a lot of a long way to go. With trade talks and all of that sort of stuff coming now, it's very difficult to see that will get out of a degree of uncertainty quickly. Diversification continues to be sensible. So global bond fund managers, global equities, the majority of equities are not UK orientated. Even where we have UK equities, their companies like lack social Vodafone, they'll deal with Brexit. They used to dealing with borders. Yes, it won't be easy for you if we have amazing brexit, smaller UK domestic players, some in particular more than others. But the world is a hole. I don't think Brexit really moves the needle. China doesn't care about BREXIT US doesn't care about BREXIT Donald Trump Something said something this morning, but I suppose if it were the heart of it, I mean, you know, if you look at the new schedule in the U. K, there's a lot of terrible things that have the other side of the world don't bother us, but absolutely and looks terrible. But the vast majority companies that we invest with either fire equities of our bonds will be impacted, but only marginally. And they will get on with business as usual. Realistically interest rate moves, quantitative tightening by the Fed, fiscal stimulus by the U. S. They have far more impact realistically. So if I think almost more painful thing will be, if we do have a very quick unwinding of uncertainty and a rally in the pound that almost do most harm in terms of the returns we're going to get in the short term, we're just moving all the talk around the politics. But the things we had an economic cycle that's been a very, very long should we start to worry about default rates are beginning to creep up S O, funnily enough, no, they're not on DH. It's partly the fact that that economic cycle is still running. It's partly, of course, the fact that, as Barry mentioned earlier, interest rates have been solo for so long that a lot of riskier borrowers have been able to term out their debts at relatively attractive rates. So if you look at it, you know measures of, for instance, interest cover the ratio between your earnings and your obligations. They're the best they've been in years. I think that this cycle, still for all that it's been very long already still has some ways to run a little bit like being in the later stages of the baseball game, where you don't actually know how long the game is going to go on like, say, football match. We've got a pretty good idea, Even if there's extra time, you know, we're sort of maybe in the seventh or the eighth inning, but there might be a few hours left to play. Andi, Is there any correlation between the length of an economic cycle on DH? The height of interest rates given were in this world where we say low interest rates equals the economic side. Well, the thing is, this is this is actually not yet the longest economic cycle of the modern era, but equally well. This has been a very unusual cycle in the rates, To my knowledge, has never been this slow for this long. So we're a little bit in uncharted territory. One thing I would say, though, is that there's been an unhealthy element to this very long cycle with very low rates, which is that they're borrowers who probably deserved to default under more normal economic circumstances and for whom, When the ultimate day of reckoning comes, I think the picture is probably going to be worse than it would have been otherwise, just because the inevitable has been delayed for so long. But in the round, that will be a case of individual companies. You don't think markets on the Virgin Minsky moment correctly realized there's a whole lot of nasties in their correct, right? What's What's your take on defense barrier? Is it when you're talking how your managers is a topic that comes up consensually? I think these two elements to this there's the default rates itself. But there's also the recovery rates, and they can look quite different. Um, what we're going to get this time is, I guess, anybody's guess. I think we would assume we will get a pick up in, devotes, um, as rates go up. Some of those companies Tom's talked about that should have gone back, I would have gone bust may well do toe again. We would hope for our managers would navigate around those, but they may have a contagion effects to the market again. We would expect that, but we would again hope a decent manager would seize the opportunities again. That creates. So in essence, we almost look forward to such opportunities on we were probably being still marginally underway. The high heeled space take that as an opportunity to increase exposure. I think recovery rates are going to be interesting. One of things are reading about this morning is that there's less subordinated issuance. Then they're wass in the financial crisis. What that means in terms of senior Borrow, is where there are defaults taking on higher losses, lower recovery rates. We'll see but central banks from May, hugely supportive. We're talking about the maybe raising rates in the years time. If the U. S. Continues to raise maybe three, four more times in the next year and continues to slow global growth, I'm struggling to see what reason the TV will have to raise rates substantially or quickly. They may have no scope. It all to do so on in that environment European rates they loaned to fold great state. And if you can yield five six percent, that's a very last return with zero rate backdrop from the central bank. Well, I remember a few years ago, it was lots of talk about this on becoming a great starting out, and then it would have required what percentage of but your appeal, see, what you would you say is a potentially is a big company. It's not a question. I have a good answer, Teo, Eh? Just think we was trying to quantify and stuff around the edges. I just I think, well, if I can, if I can not dodge the question, but answer it in a different way. I think what Barry said about recovery rates and about the degree of subordination in the market is relevant to this Because thie, if I think about the sort of borrowers that populated particularly the European hyo market during the financial crisis. Those companies that borrowed in two thousand five two thousand six Bob early in two thousand seven, there were a lot of companies than that had no business being in this market in the first place on DH had no business being funded with death. There is relatively little of that. Now, however, what you see, quite a lot of and you know, is it double digit percentage of the market, something like that. Teens are cos that perhaps can have an element of dead in their capital structure. But I have the wrong balance sheet today. So too much debt relative equity for the sort of company that they are. And so, you know, I think that of the defaults that we're seeing now, most of those companies that have their own business model of the defaults that we're going to see when the cycle turns a lot of those air going be companies that have their own balance sheet and in terms of very quickly, very mentioned subordinated financials. I know that's been a big thieving. You're fun. You're certainly going back a couple years. I think about a third of what is it today? Was so we actually, the time that you refer to was following the Bigg market correction we had in the early twenty sixteen, when there was just a very unusual evaluation opportunity in that corner of the market. There was a lot of concern about bank balance sheets, and so it was possible to pick up very reasonable subordinated bank paper at very good prices. That relative value opportunity gradually worked itself out over the following a couple of years. So we brought the subordinated banks portion of the portfolio dented a slow is fifteen percent. Not terribly long ago, during this period of market disruption, that opportunity has re emerged, and so we've turned the dial the other way. So now somethin's there sort of, ah, loaded mid twenties percentage of the portfolio. I'm very fortunate in that I've got a strong team of analysts working with me on DH. I think that the folks that we have who are looking at that corner of the market really know their stuff. So I feel I feel pretty good about the holdings that we have within that sector. Barry, you confident of the financial robustness of the financial sector these days? Ten years ago was obviously in a really, really mess. So far more so than ever. Actually, it's a question of tending to ask not too much high yield managers, more equity or macro managers that it strikes me that normally what a bank does in a economic slowdown is pausing its lending, but banks usually are lending aggressively into an economic expansion. Over the last ten years, we've seen bank tier one capital ratios rise substantially so in the sense of bank, doesn't have to potentially pull back credit in the way it normally would. It'll be really interesting to see whether they do or whether they are less have a cyclically minded than they would normally be. My suspicion is knowing banks they will pull back lending. But equally, given the fact that the central banks of moved to their rescue over the last eight years, they may be under huge pressure via politics. Donald Trump, a squire, etcetera to be supportive. Outers are B s cope. If the government wants it to continue lending to small businesses into a slowdown, I suspect they will have difficulty being as disciplined as they were in the past. Not that they were that disciplined into the expansion slowdown. Wei touched on subordinate financials. But too much is giving us a quick overview of exactly what they are. Where they fit into the capital. Struck was so attractions. What you've got is several different flavors of subordinated debt and essentially It's a question of the seniority of the bank's obligations. So you have on the one hand, so called tear to capital paper, which is relatively senior junior relative to deposits but senior relative to a lot of other obligations. Old style Tier one Capital, which is a category of debt that's not really being issued anymore. Andi so called additional tier one Capital You're Our viewers today may nose Cocos, where these air bonds that if the bank finds itself over stretched with respect to its capital ratios, can be equitized or, in some cases written down entirely so they're relatively high risk, but they offer very good returns. I think Barry's absolutely correct when he highlights the fact that the European banking system is probably in the best shape it's been since the crisis. It was, you know, a little slow. Getting there has done an awful lot of self repair, and so you know, we're not We don't lend willy nilly. We're pretty selective about thie institutions whose paper we own. Um, and we feel pretty confident that even though these downside risks there it they're going to be a lot of dominoes. You have to fall before the institutions that were exposed to find themselves in trouble. But if the European banks have repaired themselves reparative where they were ten years ago, a cynic would say, That's great. But nothing like as good as the American banks repaired themselves is good for Europe. Good enough. Commerce Bank. Well, I think that that observation is entirely fair. I think that that's a very, very true criticism, a same time getting paid pretty well for the risk. And I would say it's Maura question of them having been slow to get around to it than that, they didn't do the right thing in aggregate in the end, again when you left them this money. Is this on the full five year term? So in fact, the way most of these obligations are structured is that their perpetual bonds bonds with very, very long material. But with fixed, Cole dates on DH. So part of the judgment and buying these obligations is, Do I think that the bond is going to be cold when it becomes eligible for that treatment? And that varies by institution? We're almost out of time, so I got a couple minutes left. Barry, what the question. We're seeing a huge rise in passive investing. Just generally, is there much evidence of it in the high yields based? Yes, I think it's it's a new area where we rather not go. Tom's not an appreciative at this point. We would, we would far rather in a bond market. Invest viral Manager You can actively select credits. In essence, one of the things that passes have been champion for is a lot of return with very little fee. But I think when you're lending to lower quality credits one of the things you perhaps more interested in his risk on I guess a passive index takes far less care off the risks that maybe inherent in some of the issues on, in fact, maybe more exposed to some of those because they may be the bigger issue is the guy's Maura risk authorizing rates I think I had a quick look last night. I think I counted there were fifty seven high yield. I think there are very few, if any, was one that I'm aware ofthe hedged into sterling, available for an average buyer and where we have passive investors. Yes, they can invest in it. Well, we would strongly prefer an active manager in the space. I'm not gonna ask you to beat the drum for active management. I think we could take that as read, but I notice your funds doesn't have a performance benchmark or an asset allocation fish market stuff. Why not? Well, essentially, it's because Wait, we really azan institution were very benchmark agnostic. We the way they're not my performance is judged, is against a peer group. And so I'm trying tto beat the peer group rather than one of the indices. But thie, I mean, I think what Mary says is true about the asset class that given the relative the inefficiency of the high yield bond market, they're certainly other areas where passive investing is appropriate. You know, has big advantages, I think, in the high yield market, when you look at what the composition of the different indices of the different steps that try to mirror them are you might be surprised in what you find we r really in a way grateful to have the flexibility not to pay any attention to that and instead just to do the best job we can in absolute terms of navigating this this particular pool of risk five seconds each. Final thing that we talked to a lot of the course last forty, forty five minutes. If there's one key message for you that's come out of this for investors, if if I can make it a two parter, okay, evaluations are a great deal, more attractive young. They have been at any point in the last two years, and I think that I can say with some justice in that in absolute terms, not just relative turns. Valuations are more attractive on DH. Yet I think that the volatility that we've seen this year is a little bit of a new normal in a host Q E world. And so probably it's appropriate for investors to be thinking of high yield is primarily an income oriented asset class, and that if capital gains come than Harada. But you should be investing with an eye on those coupons with an eye on that cash. I I think for us the focus is, as I said earlier, I think on short, dated credit and theater traction for us is the yielded offices, Tom's just said, but also the fact that if you have, for example, a two three your eight year duration fund, you're going to get fifty percent of third off the fund rolling, often re fixing each year. Now, as we go through perhaps slowly rising interest rates, those that money gets reinvested at a higher rate. In essence, this gives you a a product that is not so much at risk of higher rates. It can actually over the short to medium term B a beneficiary from those high rates. Yes, painful, potentially in the short term as the rates back up and you lose some of that capital. But as they get reinvested higher up, you're locking in for four and a half percent of the start of the year. Six and a half percent now. Potentially, if raids go higher, we might be getting seven, seven and a half in a year's time. That would be outstanding investment for people. Especially if we're going into a low return world that Cube has bought. Brought forward earnings for equities. A CZ that reverses seven percent. It'll be outstanding. We have to leave it there. Thank you. And thank you very much, indeed. For watching and for sending in your questions. Do stay with us. We've got some information coming up in a second on how you can potentially use this as part of your structure. Learning just remains for me to thank our panel today. Tom Moore on Barry Count. Thanks very much from all of us here. Thanks for joining us on. Good bye for now. In order to consider the viewing of this master class as structured learning, you must completely reflective statement to demonstrate what you've learned and its relevance to you. By the end of this session, you should be able to understand and to describe the impact of rising U. S rates on the global high yield bond market. The outlook for debt issued by financials on what the new issues market reveals about the state of the high yield set class. Please complete the reflective statement to validate your CPD.