Good morning and good afternoon, everyone! My name is Poppy Rui, and I am a Program Chair with CFA Society Ottawa. Welcome to this presentation “Credit Worthy: Finding Opportunities in Uncertain Global Credit Markets”, presented by Andrzej Skiba and Jeff Roberts.

A couple of items before we begin: There will be time towards the end for your questions. Please enter these into the Q&A box at the bottom. We have consent for this presentation to be recorded, and an on-demand access link will be forwarded to you post-webinar. My colleague from CFA Society Vancouver, Amar Pandya, will be wrapping up the webinar.

At this same time, I acknowledge our annual sponsor, RBC Global Asset Management, PHN Institutional, for their continuing support, and our co-hosts, CFA Society Calgary and CFA Society Vancouver. Thank you so much for your collaboration.

And it is my pleasure to introduce our speakers, Andrzej Skiba and Jeff Roberts.

Andrzej Skiba is head of the BlueBay U.S. Fixed Income team, based in Minneapolis and Stamford. He assumed this role in 2021 following the alignment of BlueBay's U.S. business with RBC GAM-US in the same year. Andrzej moved to this position after an 8-year stint as a senior portfolio manager on the Developed Markets team, where he was responsible for global leverage finance, and investment grade, and rates. Prior to joining BlueBay in 2005, Andrzej had worked for an investment bank as a credit analyst covering European investment grade telecom, media, and utility sectors. He started his career in the investment industry back in 2001.

Jeff is an institutional portfolio manager at PH&N Institutional, focusing on global fixed income and alternative investments. He joined the firm in 2017 as an associate in the RBC Wealth Management Leadership Development Program and assumed his current role in 2022. Jeff started his career in 2010 at HSBC in the U.K. and later worked at the First West Credit Union in British Columbia in 2012.

Without further ado, let's welcome Andrzej and Jeff. The virtual stage is all yours.

Thanks very much, Poppy, for the introduction – and hello and welcome to everyone on the call. Thanks very much for joining us. We hope that you find today's discussion worth your time here today. Now, the approach that we've taken in preparing for this conversation, Andrzej and I, the way we approached it was to compile some of the more common questions that we're receiving in our roles focused on global credit markets. And so, we've put together a question-and-answer format for you today, just to address what we think are some of the most relevant topics in this area of the investment management industry that we work in. We've got some supporting materials that we'll show on screen as we go throughout as well.

Now, I am sharing this virtual stage with one of our leading experts here at RBC GAM in credit markets, and someone I consider myself lucky to work alongside quite closely, who – as mentioned in Poppy's introduction – leads our U.S. Fixed Income team out of our Stanford, Connecticut office. And he also manages many of our global corporate bond and global high yield bond strategies as well at RBC GAM, so he is the right person to be talking about global credit markets with us today.

Now, on the agenda specifically, we're going to spend some time talking about the environment that we're currently in. And if you follow credit markets at all, you'll know that credit spreads are relatively tight right now. And so, we're going to discuss why credit makes sense at the current valuations that we're seeing in markets. And from there, we'll move on to discuss ways that active management can add value within this space, and also specifically where Andrzej is seeing opportunities and risks, and how he's positioning the portfolios that he manages.

But maybe before we get onto our main topics – Andrzej, just to kick us off here - we thought the audience might benefit from learning more about your role and your background. I know the introduction was relatively comprehensive, but just to kick us off here, can you provide us with a quick overview of how you came to be in your current role leading an investment team, and what it entails in your day-to-day?

Thank you, Jeff, and hello, everyone, on this webcast, and thank you so much to the CFA Society for organizing that.

Well, it's been quite a journey. I started in London, came out of the sales side, I was at Goldman first, started on the equity side, then moved to what was then called “terrorist” fixed income. And soon after that, a lot of opportunities started arising in the European credit markets, because it's been only a few years since common currency and development of the European credit markets, so I moved to BlueBay (BlueBay Asset Management LLP) that is now part of RBC Global Asset Management and continued work on the analyst side. But then decided that I want a little bit more adrenaline in my work, so in the very quiet years of 2008-2009, I actually moved to the portfolio manager position. And it was actually great to see how we navigated through those difficult waters during the global financial crisis that gave the team a lot of confidence in addressing whatever storms may be coming our way.

So, over time, my responsibilities moved from the corporate side in Europe to oversee global strategy. I moved to the U.S. about 12 years ago to build out the team. I'm speaking to you from very cloudy today, Connecticut, in the U.S., and we have built the team to a point where we have over 30 investment professionals sitting here in Stamford, and together with our Minneapolis office, over 50 investment professionals sitting in the U.S.

So, one of the key developments for us was four years ago, we merged RBC's legacy fixed income business with that of BlueBay, and I was asked to look after that combined platform and to ensure the continuity of the investment process. So, it's been quite an exciting adventure over the recent years, not just in the markets, but also in terms of the team.

You've been consolidating power, so to speak, by bringing more and more people together and leading a larger and larger group.

Okay, so we can get into the Q&A format for questions specifically regarding credit markets that we'll be thinking about today. And starting with some of your maybe more overarching observations, as I mentioned at the top there.

Credit spreads are tight. And so, why do you think credit still makes sense at the current valuations that we're seeing in markets?

Well, clearly, spreads are not at levels that it's easy for investors to argue that they're very attractive by historical standards. We actually have a slide on page 2 that highlights the level of valuations in the asset class. So, thank you so much for putting that on screen.

And essentially, the reason why investors are looking through the fact that, in many cases, valuations are pretty tight by historical standards is the fact that the yields are still pretty attractive, and elevated by those same standards. And to a lot of institutional investors, it's actually the yield and the total return that matters. Having said that, with generic spreads at these relatively unattractive levels, our view has been, for quite some time, that this is probably the worst possible time to look at passive strategies within fixed income, particularly within investment grade, where essentially, by doing so, you have to choose the big swathes of the market at minimal spreads – at minimal compensation by historical standards. So, this is a great environment for active managers to prove their ability to deliver meaningful alpha, weighing above passive solutions. And clearly, an environment where generic spreads are unappealing, but there exist quite a lot of pockets of value and dispersion across different types of securities and sectors – it's a great environment for active managers to prove their jobs.

That's great, that's great, and we'll be coming back to that comment on active management shortly, but just before we do, maybe thinking about some of the more technical aspects of credit markets and where we are right now – can you comment on default rates and the recovery rates that we're seeing from those defaults? And maybe also comment on whether you think that weaker covenants are starting to factor in there.

Sure.

On the next slide, we're actually sharing some of the data that is highlighting both the default rates, but also the credit quality shifts within the high yield universe.

And one of the key reasons why spreads, not just in investment grade, but also in high yield, are tied by historical standards is that corporates are doing really well. When you look on the right-hand side of this chart, the level of defaults that we're seeing, particularly in the U.S., is minimal.

And in that environment, investors have high degree of confidence in ability of the issuers to pay down their debt and address the maturities and service their obligations.

That has been helped by what you can see on the left-hand side, which is the migration of quality within a global high yield space, where the share of higher-rated BBs has increased quite a lot over the last 20 years, whereas the share of CCCs – i.e., the highest risk securities – has shrunk quite considerably. One of the main reasons why we've seen this trend is that a vast majority of high-risk transactions – so we're talking about leveraged buyouts, we're talking about dividend recaps, aggressive financial engineering essentially deployed within the asset class – has migrated to the broadly syndicated loan market and to the private credit space.

Issuers wanted to have flexibility of shorter duration capital structures with greater ability to call these securities, to address these capital structures, which essentially meant that in the bond markets, high yield kind of became boring. High yield became a universe where it's really mostly about refinancing kind of steady-as-she-goes companies, but not really what was the feature of our space in the prior cycle, which is leveraged buyouts. Those have gone into the floating market, and that's one of the reasons why the credit quality has improved, but also the fact that default rates are so low. And actually, what has been a massive shift within our industry compared to the past decades – actually the default rates in the loan space are higher than those in the bond market – and that feels like something almost impossible to expect if we had this conversation 10, 20 years ago.

And what about covenants specifically? Is that more of a conversation for other parts of the market, or does it still ring true in high yield markets for you as well?

Look, covenants have been weak. There is no way of pretending that bond documentation has remained very solid. A lot of investor protections have been weakened in bond documentation. However, what we have noticed over the recent years is that the most egregious examples of such activity – whether it's sponsors or whether aggressive investors providing lifelines to the companies – that would lead to subordination of existing debt holders, some of those most aggressive features have been addressed, and current bond indentures actually provide protections against the most egregious behavior. But I'm not going to pretend and say that that means that, covenants are very strong at this stage. They're just a bit better than what has been the lowest point in recent years. But they're definitely weaker compared to the past, which is one of the reasons why it's important for us to focus on investing in companies with strong balance sheets, with strong business models – those that are unlikely to fall into trouble and see outcomes that wipe value away from existing debt holders.

That's great, that's great, and I think some of those conclusions lead us well into the next question, just speaking about opportunities to add value as an active manager like yourself. And I know our teams have been working together on a fair bit of research into active managers' performance versus passive indices and passive benchmarks, and so the next question to pose to you is just your beliefs around active managers, and if you think that you can add value in credit markets. And I think you've already hinted that you do believe you can, but more importantly, if you can elaborate on how you think you can do this consistently across the industry.

Absolutely, and look, I'm an active manager, so of course I'm biased when answering this question, but actually we have data that shows that this is not just something that applies to RBC Global Asset Management – it's something that applies broadly across the industry. So, on the next page, on page 4, what we're highlighting that whether you're looking at the investment grade space or you're looking at the high yield space, the median manager has outperformed the benchmark by quite a considerable amount over a 10-year timeframe. So, the ways in which managers outperform are different. You know, you could rely on levers such as essentially being very overweight risk during market rallies and underweight during the selloffs. As far as we're concerned, we have found over time, high-conviction, catalyst-driven, idiosyncratic credit opportunities, or sector calls to have a stronger contribution towards our returns over time. But also looking across a wide spectra of securities within the asset class, for example, looking at both senior and subordinated debt as drivers of our performance. But we passionately believe that for a manager with a strong investment process, with clear transparency of what you do, and a clear audit trail of your investment, this is a great environment to generate alpha above passive solutions, and as we're showing on this page, the data is validating that belief.

That's great, that's great, yeah, and you can see there on that page that the indices, both for investment grade corporates and for high yield, is quite firmly in the fourth quartile of performance when compared to active managers. So that's great, and thanks for elaborating on that for us, Andrzej.

Thinking about where you're adding value, where you're seeing opportunities right now. So you mentioned a few different areas, from the more focused on bottom-up, where you've consistently been able to add value in the past, but can you elaborate on where you're currently seeing the best opportunities or the best pockets of value within markets?

Sure.

We look at the current market as actually providing a lot of pockets of value, and those are to do with particular sectoral themes. Just to give you examples of some trades that we're really excited about in recent months. Recovery of California utilities after the horrible wildfires that we had earlier this year. The space has been massively punished. And we've seen a great opportunity as the legislature in California is looking to find ways to address the wildfire funds to make it sustainable for recovery within the space. That's something that started playing out, but we see more value there. Another big theme that we have seen is re-insuring focus, particularly when it comes to strategic industries like chip manufacturing. So, there's a lot of support that is going towards U.S. chip manufacturers, something that is a relatively recent phenomenon and has led to a strong performance of these credits.

We also see a very interesting theme where investors are actually favouring a subordinated paper of investment grade rated issuers, where those subordinated bonds could be high yield rated, but actually are coming to the market often at valuations that are more attractive than generic high yield, kind of plain vanilla opportunities. And that's an interesting phenomenon because the growth of the U.S. subordinated debt space, particularly in the non-financial sector, has only occurred in the last 12-18 months.

And we've seen a massive development within that segment of the market, spurred by a change in rating methodology that allowed for a higher equity credit for these issuers. But if you can imagine, strong investment grade rated issuers in sectors like utilities or pipelines, coming with 200 to 350 type spreads for dated callable securities. That is a very substantial pickup over the senior spreads. It comes as no surprise that in this environment where people are yield-seeking, we've seen tremendous growth of demand within that space.

And maybe lastly, worth mentioning, one theme that we're spending a lot of time right now across both investment grade and high yield is identifying M&A candidates. Now that the budget in the U.S. has been passed over the summer, where we have clarity in terms of taxation, in terms of deductibility rules, and the fears to do with the trade wars are abating, we're seeing a meaningful pickup in M&A activity. So we expect that to continue at an aggressive fashion throughout 2026.

So our job is to identify who could be a target and who could be the acquirer in that new M&A season. So that's something we're spending quite a lot of time, and these trades we expect to generate meaningful alpha over the coming months and quarters.

Great, great, and so I think that kind of speaks back to the comment you made earlier, that generic spreads may be tight, but there's plenty of other opportunities there and issuers there that are trading wider that you think have opportunity to perform.

And so, pivoting from opportunities to maybe an area that, Andrzej, you and I have spoken about quite frequently is the risks side of things. So, positives with opportunities, but maybe thinking more about risks on the horizon, and specifically looking across the credit universe that you cover. What really makes you uneasy right now when you're thinking about this from an investment manager's perspective?

Look, as I mentioned, generic valuations are not that interesting, so that is not something that investors should be comfortable about. However, generic valuations are rarely a trigger by themselves for negative price action in our markets. You need to have some external developments. And I think when investors are looking at our universe, there are three topics that come up from the kind of “worry” section of the our conversations. The first one is actually pretty simple. It's to do with the outlook for government bond yields. If we see a meaningful drop in government bond yields, particularly Treasury yields, over the coming year – and I'm not talking about the front end of the curve, where most of the adjustment for the rate cuts has been reflected, but more about the 10, 30 points along the U.S. Treasury curve – that is likely to diminish marginal demand from yield-sensitive buyers.

So far, that has not really occurred. So far, we have seen a steepening trade playing through, where the two-year Treasuries rallied quite a bit on rate cut expectation. However, because of elevated deficits, the 10 and 30 point have not really come down in yield terms a lot. If that is to continue, we think that will create a strong backdrop for credit demand and potential for high single-digit returns over the next 12 months in the asset class. However, if you have an aggressive shift lower in yields – which is not our base case, but if that were to happen – further out the curve, we think some of the marginal buying from yield-sensitive buyers will lighten. And at a time when issuance is expected to remain brisk, that could create pressures for spreads.

Connected to that is actually, I mentioned the outlook for deficits – our concerns that investors have about sustainability of U.S. fiscal situation. And we think that, yes, it's true that deficit running around 6-7% is way too high, but for as long as U.S. economy manages to avoid a recession, we think that that is something that the market will look past.

As far as we're concerned, we're seeing a slowdown in the second half of this year, but re-acceleration of growth in 2026, and that's based on cumulative impact of rate cuts, and the aggressive deregulation push from this administration. So, if animal spirits do come back when it comes to the U.S. economy in 2026, that will be an environment where elevated level of deficit is unlikely to trigger any bond vigilante talk, and market will just look through that, but it's definitely something worth paying close attention to.

And the last area that triggers quite a lot of concerned conversations is private credit. And we actually have a slide on page 5 where we're highlighting the difference between different asset classes, and we have quite a lot of investors asking us questions: Should we be concerned about private credit as an asset class? The fact that, for example, looking at public vehicles – the business development corporations (BDCs) – they are showing very substantial use of payment-in-kind features, i.e., portfolio companies unable to pay cash interest and resorting to using that payment-in-kind feature. And that is something that is concerning investors, whether it's showing weakness and vulnerability within that segment of the market.

On the next slide, we're actually highlighting how, from our perspective, that concern has been valid up until this point. When you're looking at the leverage within this space in the U.S., at the mid-market lending – excluding non-cash addbacks, so the non-cash items that are expected to materialize but have not happened yet – and this space is very aggressively using those outbacks, with leverage running closer to 7 times and often double-digit cost of funding from the get-go. You know, around 70%, two-thirds of your EBITDA goes just to pay interest. When, on top of that, you have to spend money on CapEx, on working capital, on maybe some tax obligations, there's literally no cash flow left. Which explains why so many of those portfolio companies are using the payment-in-kind feature. That is not a healthy setup. And that is one of the reasons why we felt strongly over the recent years that, on a risk-adjusted basis, whether it's the broadly syndicated market or the bond market that the public space looks much better on a risk-adjusted basis than private credit, given vulnerabilities we're describing there.

Having said that, we are not of the view that this space is doomed and is likely to implode. The key reason why some relief could be coming for private credit portfolio companies is to do with the rate cuts. We do believe in rate cuts manifesting this year and next. That will help create more breathing space for portfolio companies within private credit, so some of the pressures that were seen up until recently will diminish. Having said that, some of the concerns we're hearing from investors then relate to the fact that when rate cuts happen, your total returns come down with the fall of your reference rate, like SOFR in the U.S.

So the question lies whether these issuers will resort to using more aggressive leverage, more financial engineering to achieve target returns – something that could add a different kind of risk into these structures. So, we think that the conditions for private credit are easing a bit, but it still looks, on the risk-adjusted basis, inferior to us compared to public markets, whether that's in the bond space or in broadly syndicated loan space.

That's great, yeah. So definitely not a “sky is falling” sort of message, but more that, on a relative basis, with all the money that's flown into private credit, there's been created opportunities on the public credit side. And so, the follow-up that I have for you on that is if you can just comment about the structure of public credit markets, and if they've been changing with the growth of private credit, because this is something that we do hear about quite frequently from inbound questions.

Look, we are seeing competition between the markets. So, after a tremendous growth we've seen in private credit, the broadly syndicated loan markets started actually shrinking for the first time in years. So, a boxing match between the two has ensued in terms of ability to attract investor attention.

And that means that the margins on private credit opportunities have come down to accommodate that competition from generally tighter spread, lower margin broadly syndicated loan market. But also, as those two are fighting, the high-yield space – given lack of issuance that we've seen in recent years – is offering opportunities for senior secured issuance and diverting attention from the other two floating markets. And that tug-of-war between the three has definitely picked up in recent times. Something that we think is a good development, because it creates more opportunities for investors – but also means that, over time, we would expect private credit to come closer to the terms and standardization of the broadly syndicated market, as the markets become so interchangeable in terms of investor demand and appeal. But that also inevitably will mean that the margins – extra yield that you can earn on private credit investments – is likely to shrink as well.

Yeah, that's great, that's great. And I guess pivoting ahead here to the last question before we go to take any questions that have come through on the line. Pulling ourselves back, thinking about how you're positioning your portfolios overall, you've touched on some of the opportunities, some of the risks, but what catalysts are you looking for over the next few months, and can I give us your biggest top-down views in terms of the positioning of the portfolios and how you're viewing the market?

Sure, and I think we're showing that on the last slide.

As far as we're concerned, this is the right time to be overweight in credit, but focus on where the pockets of value are, rather than generic spreads. Also, it's important to be careful not to overstretch your portfolios and gain exposure to vulnerable companies just because they offer a bit more yield or spread. Because in an environment where we do expect second-half slowdown, that could be a dangerous game to play. Having said that, we expect robust demand for credit over the coming year. As rate cuts materialize, that will support total returns for investors. I mentioned earlier, the high single-digit returns in investment grade are pretty likely in dollar terms. Similar returns are plausible within the global high-yield space. It's just that in the first one, you need some cooperation from Treasury yields and from general government bond yields, whereas in high yield, that relies more on carry income. But high single-digit returns is competitive by historical standards, so we expect continued demand within the asset class. And as economy is on stronger footing in ‘26, based on our views, that should further cement the demand profile within the asset class.

The last point worth making is, we haven't even mentioned money market balances. We have over USD 7 trillion of money market balances that have not really started depleting in any meaningful way yet. That normally happens once the rate cuts occur, so about now should be the start of that development. And you could easily see hundreds and hundreds of billions of money market investments moving further out the curve in credit, but also to other asset classes like equities. So it could have a meaningful impact on the spread outlook and on-demand outlook for the asset class, something that we would not underestimate.

Overweight buyers, but with a focus on high-quality issuers with less growth sensitivity. And preferring, within investment grade, looking down the capital structures of strong investment grade issuers for extra spread pickup. Whereas in high yield, looking at those issuers that are not vulnerable to weaker cyclical markets that they may be exposed to, so focusing on quality within high yield.

Great, great, thank you very much for summarizing that quite well there. And so that's the prepared questions and answers that we have, but I do understand that a few more questions have come in over the line since then. So, Amar, I believe you're well positioned there to pull up those questions and put them forward to Andrzej and myself.

Absolutely. Thanks, Jeff. So once again, if you have any questions, please submit them via the Q&A chat box on the Zoom. So maybe to start – Andrzej, you showed the performance of the index versus active funds, and made quite a compelling case for active management. In your view, what is the most dependable lever for generating alpha in credit markets?

So, as far as we're concerned, I can only speak about RBC Global Asset Management and the BlueBay Fixed Income Team. It's been high-conviction, single-issuer or single-sector calls. We felt that, over time, that once you have these high-conviction views with specific catalysts that we see on the horizon, the information ratio from those trades compared to generic exposure to, let's say, single As versus BBBs, or EM versus DM – it looks just much stronger. But in order to be able to take advantage of these views, you need to have size that allows you to source these opportunities in notionals that make a difference to your portfolio.

And a lot of managers within our asset class have grown a lot in recent years. There's nothing wrong about that, but it lends to a situation where some are just too big to be able to source these opportunities.

And I think, from our perspective, we are able to deploy those single name or sector calls in sizes that make a difference. That's why we feel very strongly about alpha focus over pure AUM focus within the asset class.

Okay, excellent. And then we had a question – you mentioned that high-yield Euro default rates are slightly higher than the U.S., so has private credit not taken the same role in the EU as it has in the U.S.?

It has, but to a smaller extent. And I think what also happened is – in Europe, you have more cyclical credits than you have in the U.S. as a portion of the investment universe. So, as you can imagine, with economic malaise in quite a lot of European countries, and meaningful exposure to China for some of them – when China is not doing super well in terms of growth – that had a disproportionate impact in Europe. Also, you have to note higher energy costs because of disruptions related to the war in Ukraine, and that led to a squeeze on cash flows within growth-sensitive sectors there. So, that's one of the reasons why we've seen a higher level of restructuring – still low by historical standards, but more than in the U.S., in Europe.

Okay, perfect. And, fiscal expansion has been getting a lot more attention recently. Do you have any views on how this may impact credit markets over the next five years?

Well, when it comes to Europe, for example – everyone's talking about Germany changing their perspective on deficits and opening the tabs to support the economy.

All of our conversations with policymakers in Germany – and we spent actually quite a lot of time speaking to central bankers, to politicians, to regulators – suggest actually that deployment of that cash might be slower than investors are hoping to see. So it's definitely a positive when it comes to German economy, but it's not a bazooka that some might have been hoping for.

At the same time, what is interesting to us is that tariff income and the cost to exporters, particularly in European Union, associated with U.S. tariffs, has not fully filtered through yet. So there's going to be more pain coming in those geographies. We estimate that the Treasury receipts on the tariff side indicate more like 7-8% tariffs, where the real level is more in mid-teens. So, some of that could be with inability to collect the tariffs, some of that not happening yet. So actually, fiscal expansion is needed just to offset some of the negative effects that might be coming for non-U.S. exporters into the U.S. as a result of the tariffs.

In the U.S., we expect deficits, as I mentioned, to remain elevated. But we do note that, thanks to the tariff income, we have moved from the sevens to mid-sixes. And if economic growth materializes, as we expect – some acceleration in ‘26 – that could shrink a bit further, but will still, in our opinion, stay at levels that make many investors uncomfortable and lead to elevated term premium further out the curve in U.S. Treasuries.

Okay, excellent. And, how does liquidity factor into your positioning? And given tighter spreads and potential for volatility, are you building more liquidity optionality into your portfolios?

So, we've been using credit derivatives across our portfolios for many, many years. We were actually one of the first users in a number of markets of credit derivatives, and they do play a significant role in helping us to modulate risk across the portfolio. But our investment attitude has always been that if you want to de-risk your portfolios, the right answer is to sell bonds. It's not to add a ton of hedges and hope for the best, because it tends to be the case that hedges only support you for some time, and when they become very heavily owned and populated, their efficacy in protecting strategies in down markets, goes down.

So the right answer is always to sell down risk. And with that in mind, what has been really helpful from a liquidity perspective is the development of the portfolio trade functionality. So, even a few years ago, most of our electronic trading happened on individual bond basis, where you could sell 2-3 million – or buy, if you'd like to – using electronic platforms.

In the last two years, there's been an explosion of portfolio trading activity, where you submit entire portfolios into electronic systems, and banks are competing against each other for those portfolios, whether you're buying or selling, and provide you with complete transparency of what levels they're bidding for individual bonds. And that has transformed trading in both investment grade and in high yield, where, just from our example, we have traded a number of billion-plus portfolio trades in recent months on the investment grade side, and multi-hundred million portfolio trades in high yield. Where it allows you for very quick transformation of risk within your strategy.

So if you need to raise liquidity, or if you need to de-risk, or add risk within your strategy, you can affect that very quickly with these portfolio trades – something that was not a feature of our markets even a few years ago. And for a manager that has optimal size, it allows for meaningful change across your portfolios.

So that's really positive development when it comes to liquidity within our asset class.

Okay, excellent. And you mentioned the growth in private direct lending, which is increasing vulnerability to recession risk. Are there any particular industries or sectors that you think are more at risk from a slowdown?

Well, the obvious one is the ones that were most directly tariff-impacted.

We're also seeing deep cyclicals suffering because of overcapacity issues right now. But also, you have some sectors that have undergone meaningful secular changes. Like, a great example of that would be the cable space, where the cable industry was seen as highest-quality, steady-as-you-go sector over many years. And between the combination of cord-cutting and the push of wireline providers – and mobile players – into wireless Wi-Fi, that has actually changed the dynamic within the sector, really changed the outlook for cash flows and growth within the space. So, it's a combination of sectors that are undergoing cyclical pressures, some of which are trade war-related, and some of them to do with secular pressures, like I mentioned in the cable space, or, for example, discretionary retailers, with department stores really struggling in an age of digital buying.

Perfect. And, the last question, Andrzej. So the improvement in credit quality of the high-yield Index over the last 20 years is quite staggering. Do you have any insights into what has been the main driver? Is it weaker covenants in markets like private credit?

It's mainly the fact that over time, as more and more of the aggressive, low-rated transactions migrated to the broadly syndicated market – broadly syndicated loan market – or the private credit space, fewer and fewer of those were a part of the bond universe. So, as bonds were being called or redeemed, the marginal credit quality has improved within the asset class. We've also had an influx of BB high – higher-rated BB issuers – back in 2020, when we had a wave of fallen angels within our universe. Most of them reverted back to investment weight in recent years, but some are still within our asset class, but that supported the double-B cohort within the sector.

We do not expect any dramatic worsening of trends from here. Again, those most aggressive transactions, like LBOs, do not really tend to come into the public market space on the bond side.

Excellent. Well, thank you, Andrzej and Jeff, for that very insightful and timely discussion. I think from your presentation, the biggest takeaways are: while credit spreads are tight, there are still pockets of value in the market that active managers are able to take advantage of.

As spreads continue to squeeze tighter, Andrzej has been focused on quality defensive, and financial issuers with lower leverage profiles. And with the ongoing debate around public versus private debt, Andrzej and his team prefer public debt due to its cleaner structure, having more limited default risk, and most importantly, volatility-driven dislocations, providing meaningful alpha generation opportunities.

Credit is an undeniably integral part of an institutional investor's portfolio. It helps diversify away from equities. While global markets remain uncertain, it is more important than ever to take another look at your credit exposure to ensure you are properly diversified.

We will be following up with a brief survey. Please take a few minutes to let us know what you enjoyed today, and what other presentation topics would be relevant and useful to you. Once again, we acknowledge our annual sponsor, RBC Global Asset Management, PH&N Institutional, and our friends at other CFA societies for their collaboration. Our societies look forward to bringing you more presentations in person and online, so stay tuned – and thank you so much for joining us today.

Thank you so much.

Thank you.