Bryan Krug – An Update on Corporate Credit

**Patrick O'Shaughnessy** (0:04)
Hello, and welcome everyone. I'm Patrick O'Shaughnessy, and this is Invest Like the Best. This show is an open-ended exploration of markets, ideas, methods, stories, and of strategies that will help you better invest both your time and your money. You can learn more and stay up to date at investorfieldguide.com.

**SPEAKER_1** (0:24)
Patrick O'Shaughnessy is the CEO of O'Shaughnessy Asset Management.
All opinions expressed by Patrick and podcast guests are solely their own opinions and do not reflect the opinion of O'Shaughnessy Asset Management. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of O'Shaughnessy Asset Management may maintain positions in the securities discussed in this podcast.

**Patrick O'Shaughnessy** (0:47)
My guest in this flash podcast is Bryan Krug of Artisan Partners. We discussed what has happened so far in the corporate high yield and investment grade credit markets and the loan market. We compared today's environment to the financial crisis and other past crises with lots of nuance that I hope will be helpful to bond and equity investors. Please enjoy.
So, Bryan, I really appreciate you taking the time. I know we both have insanely busy schedules today, but giving people information on key parts of the market, I think, is really important in these times.
And you're operating in the corporate credit sphere. I'd love for you to begin by describing sort of the universe of companies and securities, more specifically, that you cover, so that we can dive into what has happened so far and what you're watching most closely in the corporate credit market.

**Bryan Krug** (1:30)
What we look at in my strategies, we invest it across the debt spectrum. Predominantly, we're primarily in the leverage credit market. So the leverage finance market incorporates high-yield bonds, leverage loans, and then selectively, we'll look at some investment-grade credit as well.
All the credit that we're looking at is syndicated, it trades through broker dealers.

**Patrick O'Shaughnessy** (1:52)
You opened our conversation before we hit record by saying that the world has changed a lot very quickly for you and your team. Maybe highlight the most interesting or important ways in which it has changed in the last couple of weeks.

**Bryan Krug** (2:03)
When you look at the corporate credit market, we're looking to invest in companies where we believe that there's not the impairment, and then we tend to look at relative value base on the risk that we're taking of the industry and the company that we're considering making investments in. And if you look in the last couple of weeks, there's been a couple of massive shocks. The first big shock is obviously with the coronavirus, and the implications there are obviously extremely broad-based from not only a consumer perspective, but if you go into individual sectors, such as cruise lines or airlines, which have been traditionally investment-grade credits, are now starting to trade more like high-yield credits because of credit concerns. On the duration of this potential of the coronavirus and the severity of it, and then combining that, you get a massive shock with a fight between the Saudis and the Russians.
And essentially, it's a nuclear war in the oil space. And as a result of that nuclear war, the price of the commodity has dropped.
And as you think of more incremental players, such as shale, shale doesn't work at these levels on a sustained basis. And then you kind of take the second derivative from that and you kind of go to MLPs and other areas. If the shale market has bankruptcies, then there are also implications regarding the MLP space of the market as well. And then on top of that, from a market perspective, you've had just a massive repricing of risk across all asset classes. And that massive repricing of risk has resulted in cred spreads blowing out meaningfully and in a little bit of a panic environment. And quite frankly, this environment, the nearest comp is quite frankly, we're not quite the same severity, but of an 8 type level where you've got some panic selling, very quick repricing on debt instruments. And so that's kind of where we are today.

**Patrick O'Shaughnessy** (3:56)
Can you talk about the composition of the high yield market specifically?
You mentioned energy, some of the cruise liners and others that normally have been investment grade now trading like high yield. Ratings have been static thus far. I'm sure we'll get ratings changes. I'd like to talk about that too. But talk about the composition of that high yield group. How much of it is energy?
How sensitive is the composition of that group to the major things that have happened thus far?