Why US Bankruptcies are Rising Again

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00:00Time now for the Wall Street Beat because joining us now King Street founder and managing partner

00:04Brian Higgins. King Street has 30 years of experience in investing in credit and manages

00:09about 28 billion of assets. And I wanted to start with you with exactly that, the bond market. I

00:15wanted to start with you with the 10-year yield because a lot of people are noticing that this

00:19kind of nearly 4.5% level on the 10-year, roughly 5% level on the 30-year, it's sticking. And that

00:27is something that you have to imagine the Treasury Secretary is watching quite closely.

00:31For sure. Thanks for having me. Always a pleasure to be here. What's happening is the market is

00:38taking this wait-and-see attitude on inflation, on the budget deficit. And it was told that with

00:44those, with cost savings, with the tariff income, there would be a reduction of the deficit. And

00:52they understand there's 10 trillion to be refinanced. And there's certainly a lot of

00:56competition for capital. Well, that refinancing is what gets me a little bit. Because if you have

01:01a budget deficit that you're sitting with, and the cost of interest alone is looking at a 4.5%

01:0610-year, you've got a problem on your hands. Well, you have a problem. I mean, it's never a problem.

01:12Ultimately, there's always a buyer for U.S. Treasuries. I think what happens is it makes it expensive for

01:17everyone else to do business at the base rate being where it is. It is an attractive time. You are being

01:22compensated to be in fixed income. Now, spreads have rebounded since Liberation Day. They've done

01:27a round trip. And so 350 over for high yield and record tights for both investment grade and high

01:33yield. However, and what's that saying to you? It's saying to you, well, risk of recession is 10%.

01:39However, if you look at small cap stocks, for example, they're saying risk of recession is 50%.

01:44So when we talk about dispersion, it's just dispersion of outcomes, dispersion of assumptions

01:50as well. And so that uncertainty, while it has come down, I think part of it is the tail risk has

01:56been truncated. It was such a wild, how do you factor in 100% inflation tariffs, which cause

02:03inflation and slowdown to a more moderate level. But again, it's still devil in the details as we are

02:09waiting to see what the final cut. These are back of the envelope or handshake agreements,

02:12trade agreements many times are 2,000, 3,000 pages long and take long time to negotiate.

02:18And so I think a number of industries are, you know, if you look at soft data versus hard data,

02:22there's still a question as to where that, where that, you know, comes out. The initial soft data

02:28was everyone suspended guidance and said, I have no idea. And so if you pull them today, I think they

02:33would have a more constructive view. However, the hard data, we'll see if that follows. So far,

02:38it's been strong. Earnings been strong first quarter. Defaults are still really low.

02:42Credit spreads are low. So CPI was good. But PPI, I think, you know, as I said, they're holding the

02:49line, but their margins have been impacted. And so you saw Walmart say, hey, wait a minute,

02:53we don't know how long we can hold this, which would then impact the consumer, which then filters

02:57into the hard data. Well, and if they don't raise prices too much, it really doesn't matter,

03:01right? I mean, the question is, how much are they going to have to raise prices at the end of the day?

03:06Where are these tariffs going to end up? Do you have any view into that?

03:11I think I'm with everyone else, which is a lot of uncertainty.

03:15But is 10% really a floor, Ryan? Do you think? That's what Scott Besson told surveillance at the

03:20beginning of the week. Is 10% really a floor for not just the Chinese, for everybody? Is that where

03:26Donald Trump is going to keep tariffs for the remainder of his presidency?

03:30It appears to me the administration is using uncertainty to negotiate. And so I think to

03:37say that it's going to be 10%, however, if there are certain outcomes which aren't as they're

03:43agreed upon or hoped for, perhaps they would reserve that right to increase them. Again,

03:48I'm not involved in this situation. So this is a very difficult prediction. However, I do think

03:55if you say 10% is an assumption, then certainly it'll be a more benign impact on that.

04:00However, there's still housing affordability is at 30-year lows. And you think about the

04:06durable goods, people are still worrying about the uncertainty there. What impacts? So there's

04:11still a lot of inflation on the soft goods and durable goods and consumer cyclicals are still

04:16under pressure. And with higher for longer, as again, as I said, infrastructure, utilities,

04:21energy, there's a lot of these CapEx spend that need to be done. So again, that competition

04:26for capital keeps the base rate and spreads at a healthy level.

04:31Brian, I'm really curious. I want to bring up what we're seeing in terms of bankruptcies,

04:34because you have been seeing not alarming levels here, but a tick higher, particularly in those

04:40sectors that you're talking about where the consumer is more impacted.

04:43By the way, I was alarmed about bankruptcies until I saw the longer term chart.

04:47Yeah, it doesn't look historically nuts. But it's never a good thing when you have companies either

04:53start to file for Chapter 11 or go back to restructure, which we're starting to see a lot

04:58of that happen. So it's not even reflecting all the pain. Where are the cracks forming?

05:03Well, if you look at the broader syndicated loan market, the B minus is 28% or something record levels.

05:08And so private credit and the broader syndicated loan market would be our new issue market where we're

05:13going to see opportunities. We do a lot of liability management exercises. So there's opportunities to

05:17restructure outside of the bankruptcy context. Bankruptcies have been low because the fiscal

05:22monetary policy have been very easy. And it's been a tailwind and rates have come down and then have

05:28gone up dramatically, but not enough to to impact these companies. And there's been a money supply has

05:34been very abundant and so enabled. There's not a not a real problem with getting capital. So there's been

05:40record amounts of money raised in the credit markets, for example. And so that's been able

05:45to go in and finance all these companies. However, as I said, you know, when it's higher for longer,

05:50that does come into effect. The consumer has been has been doing just fine. However, they're starting

05:57to get weaker. We've been talking about for quite some time on the lower middle end of the consumer

06:00market that is getting pressure, which is then follow through into bankruptcies. But for the moment,

06:05it's still being out of court, which is means a lower bankruptcy, more of the out of court.

06:09We're putting together that is a higher number, but still lower than the trend.

06:12The translation is even though companies are not going into bankruptcies,

06:15they're still going to credit companies and saying, well, wait a minute, we got some problems

06:19here. We have to restructure or we will go into bankruptcy. Yeah, that's, I think, a lot like the

06:23hard data, soft data not translating yet into the hard data. And maybe it will. I have yet to really

06:29wrap my head around this Federal Reserve story. But Jay Powell apparently at a research conference said

06:35they're considering changes to their framework in terms of how they think about shortfalls in

06:41employment and their approach to the inflation target. What's your view of the Fed and how they assess

06:46things right now? Well, it's been a lot of criticism by the current administration on the Fed. And I think

06:53it's important just to say that over the life, you know, the last couple of decades have been a lot of issues

06:59that they've navigated well. There's a lot of question as to why had they lowered rates last fall

07:05versus not lowering now. I think it's, again, the question of the tariffs. Certainly, I think there's

07:10an issue, question on monetary policy from the Treasury's view. Why not extend out duration when

07:15they could have? So there's been a lot of second guessing. These are difficult jobs. But the important

07:20question is, what do you think the Fed is going to do now? My view would be they're going to wait.

07:26If you think about rates, where they're going to 4% to 6% given the data, they're going to have to

07:30wait to see how the budget negotiations go with Congress, which, you know, reached the debt limit

07:35in August. They're going to see how some of these tariff negotiations go. There's a lot of

07:39uncertainty. And policy, Fed policy, central bank policy, it's like turning a supertanker. It's on a

07:46speedboat. So you can't tack back and forth because it takes a while to go through the system. There's a lot

07:52of expectations that are met.

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