The Debt Civil War and "The Organic Recession" (w/ Ed Harrison and Ash Bennington)

TL;DR

Distressed companies are seeking new financing that allows lenders to maneuver to the top of the capital stack, prioritizing their repayment over other creditors, leading to a race for yield.

Transcript

welcome to real vision it's friday october 16 2020 just after market close in new york this is the real vision daily briefing i'm ash bennington joined shortly by our managing editor ed harrison but first with the day's stories jack farley welcome jack thanks ash great to be here as always how are you i'm doing well so what are the facts jack well ... Read More

Key Insights

• ❓ Priming is a strategy used by lenders to secure repayment ahead of other creditors in distressed companies.
• 😘 The hunt for yield in the low rate environment has led to less restrictive covenants in leveraged loans, making them vulnerable to priming.
• 📡 Oaktree's involvement in priming is significant due to its reputation and signals the intense competition for yield.
• 😘 The Federal Reserve's low rate policy has enhanced the race for yield and shifted the balance in favor of issuers.
• 🇸🇪 Companies with domestic focus in Sweden may outperform due to their sustainable approach to the pandemic.
• 😀 Italy, with its high government debt and potential localized lockdowns, faces challenges in managing the crisis.
• 🌎 Warren Buffett's shift from Wells Fargo to Bank of America suggests potential downside risk in investment banks.
• 🆘 Real Vision is implementing content curation techniques to help subscribers navigate the vast amount of content available.

Questions & Answers

Q: What is priming in the context of distress fixed income?

Priming is when a lender offers new financing to a distressed company and positions themselves at the top of the capital stack, allowing them to receive repayment ahead of other creditors.

Q: Why is Oaktree's involvement in priming significant?

Oaktree, known for its pristine reputation, engaging in priming indicates the intense competition for yield and the willingness of even reputable players to prioritize their interests and those of their investors.

Q: How has the hunt for yield impacted the leveraged loan market?

Due to the low rate environment, leveraged loans have seen lower restrictions and less restrictive covenants, making them vulnerable to priming transactions and resulting in a race to the bottom for yield.

Q: How does priming relate to the macroeconomic picture and the role of the Federal Reserve?

The low rate environment created by the Federal Reserve has shifted the balance in favor of issuers, allowing them to strip out restrictive covenants and issue covenant-lite loans. This has led to increased competition among creditors for yield.

Summary & Key Takeaways

• Priming is a trend in distress fixed income where cash-strapped companies take on new financing from lenders who position themselves at the top of the capital stack, cutting in line ahead of other creditors.

• Oaktree recently engaged in priming, signaling a shift in their usual approach and highlighting the intense competition for yield in the low rate environment.

• The hunt for yield has led to lower restrictions and less restrictive covenants in leveraged loans, making them vulnerable to priming transactions.