Below is the transcript of a CNBC Exclusive interview with William Bohnsack, President & Senior Partner, Oak Hill Advisors. If you choose to use anything, please attribute to CNBC, Martin Soong, and Sri Jegarajah.
Sri Jegarajah (SJ): Bring in William Bohnsack, President and Senior Partner at Oak Hill advisors. He’s part of the Singapore Summit 2020 participating virtually from New York. William, great to see you there. Can we first start off with the case for credit? How does it stack up? And is high yield looking a little bit dicey considering the default risk especially coming from this region?
William Bohnsack (WB): Well thank you. It’s a pleasure to be on the show today. How does credit set up? Credit has historically set up somewhere between the equity markets and the hybrid fixed income markets and today we’re in an environment where equities globally have responded throughout the summer. In the United States, you know, our markets are, we just had an all-time high in the S&P less than two weeks ago. We’re 5% off that all time high today in the S&P. And yet on the other hand with treasuries, at very, very low level central banks globally, pushing rates lower injecting liquidity into the system, you’ve got a 10 year in the US at trading, I think we just saw 67 basis points, that’s less than seven tenths of 1% yield. The German 10 year at a negative 48 basis points. So you’re in an environment where investors are caught between two potentially unappetizing choices, and credit sits in the middle, offering higher yields and potential for attractive total returns if spreads and yields declined over time and protecting the downside through a debt capital structure or security or seniority in the event that the valuation of the company falls, so, credit in this environment is seeing a lot of interest from investors. In particular, we focus on alternative credit. We see opportunity today.
SJ: But, William, wherever you look, especially in this part of the world, there is elevated debt profile, whether it’s in corporate on the corporate side, whether it’s on the commercial, the consumer side or the sovereign side, which seems to be the normal second round derivative offer this profound COVID shock on the broader economy. Doesn’t that mean we have to take a more cautious approach, especially to high yield in this region? And how does the default risk look like to you?
WB: Right, so default risk is elevated relative to what we’ve seen over the last couple years, largely due to what we’ve seen in sectors particularly hit by COVID. Anything that you know, restaurants, retail, airlines, certain sectors within energy, we see that they are struggling more so than in other parts of the economy. Yields are very low levels and default rates are increasing. And so that creates challenges even within debt for where investors can find good opportunity. So within credit, where it’s really exceptionally important in this environment to pick the right companies with the right sort of risk return profile, that you’re doing your work to really understand the safety of the companies, whether the cash flow in those companies is going to be there to support the debt. So, this is not an easy time for any type of fixed income investor.
Martin Soong (MS): Bill, this is Martin here. Let me quickly jump in with a question. Not an easy time for fixed income investors. But for folks like yourselves, at Oak Hill Advisors, you guys are sort of like… you dare to go where most folks don’t or wouldn’t want to go right. You are distressed debt experts. So, this potentially could be a very good time for you guys.
WB: So that has historically been a big part of our business. We manage a large distressed debt business across our platform. And today, that distressed effort is focusing, in many cases, on providing new capital to companies that are facing stress because of the dislocation we’re seeing with the pandemic. So providing capital, which we will call rescue financing, giving companies a lifeline in terms of additional liquidity to see their way through the next couple of years, where we can find market leading businesses, great management teams, but companies that are dealing with challenges that they weren’t any part of making, but they’re needing to find a way to go through it. So that’s quite an interesting part of our business for sure. We are seeing, I’d say an even bigger sort of trend in our business of larger companies, particularly in the United States, companies with a billion dollars of enterprise value, they may be a market leading company, maybe generating more than 100 million dollars in annual EBITDA coming to our market for financing because they may not want to use the syndicated markets, they may not find that the banks are there for them. And we can step in, structure a loan that makes sense for us with good downside protection that really finds the company with a capital solution that helps them accomplish what they’re looking for.
MS: Bill, where do you find where are you finding the best opportunities in distressed debt right now?
WB: You know, I would say that that we’ve found that certainly through the March and April time period where you saw pronounced sell off in the secondary markets of good companies, but with capital structures, maybe just a bit too much debt. We saw a significant sell off in high yield and leverage loans and there were opportunities to buy good companies with distressed prices. That opportunity was great for firms like us, we stepped forward and invested two, three billion dollars in that period of time. But as the secondary or liquid markets have traded back up, over the last couple of months, where we’ve really been focused is much more on the private market opportunity. Again, these are off the run. Typically, proprietarily originated transactions, often, as I said, where it’s an opportunity for us to put new money into a capital structure. Just a month ago, we actually did what we thought was a very transformative financing for a company that was simultaneously looking to deleverage. They felt they had too much debt, but they were also looking to go public in a SPAC transaction. So we stepped forward with, in that case, $500 million of new capital, in a structured convertible note in a very attractive part of the capital structure that gave us opportunity to participate in the equity upside in the company, and also gives us downside protection through the debt security that we’re able to fashion.
SJ: William, just give us a sense of how the metrics are stacking up outside this region. I’m talking about Europe because you’ve got exposure to some of the credit markets and assets over there in that region. Now, Fitch has taken ratings actions on two Oak Hill European credit partners, collateralized loan obligations, does that imply that you’re going to trade a little bit more cautiously around European credit or are you reassessing your positions there or are you just striking that one off?
WB: Well, actually we have a big and active position in the European credit markets. Like our US business, we are financing up and down the capital structure of companies in both the syndicated performing markets as well as the distressed and in private credit markets. The Fitch Ratings that you were referring to are related to some of our prior CLO transactions where we’re invested in syndicated senior secured loans of typically performing companies. And we feel quite good about those CLOs, where we have concerns in Europe right now, is really the fact that the banks themselves are in a much more tenuous position with their balance sheets. They, as a result, are worried about their capital positions, are tending to pull back from financing many of the companies and industries that have historically relied on the banks. That’s interestingly giving opportunities to firms like ours to step forward and provide, again, similar types of financing that I was just talking to – rescued financing, replacement financing where the banks again, pulled back, but again, it’s been very, very focused on the types of companies. In Europe, you have to be very careful about which jurisdictions you’re operating in, because each jurisdiction has more or less creditor friendly sort of application of law in terms of how you protect your position as a lender. So we’ve been active in European markets for more than 25 years. We think that now is actually a time where we need to be very selective, we think that the opportunities may be better next year than it is today.
MS: Bill listen, great to talk to you. Thanks for spending time with us, appreciate it very much. You keep safe. Will Bohnsack there from Oak Hill Advisors. Joining us live.
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