John McClain - Opportunities in Credit

John McClain, CFA stops by The Business Brew for a discussion about credit. John serves as a portfolio manager for the Brandywine Global’s High Yield and Corporate Credit Strategies. In this episode John makes the case for why high yield credit is a good bet after a bad year, discusses how corporate finance departments are more professional now (vs pre GFC), talks about companies adding value by buying back debt, and much more.   Before joining Brandywine Global, John was a Senior Vice President - Credit at Standard Life Investments from 2010 to 2014. From 2007 to 2010, he was with Nationwide Mutual Insurance as a Management Associate in the Financial Leadership Rotation Program and then an Investment Analyst in Distressed Debt. John is a CFA charterholder and earned a Master of Business Administration from Carnegie Mellon University and has a Bachelor of Science in Business Economics from University of Kentucky (magna cum laude). BrandywineGlobal’s High Yield Fund has earned a 5 star rating from Morningstar. Morningstar gives the fund above average ratings for Process and People. In the words of Morningstar, “the strategy’s distinctive, value-oriented approach exploits price inefficiencies that often materialize across smaller high-yield issuers. It earns an Above Average Process rating…Comanagers Bill Zox and John McClain execute a disciplined value approach: They buy issues when their market prices are lower than the team's estimate of intrinsic business value and sell them when their initial thesis has played out or when there are better opportunities in the market.” This episode is sponsored by Stratosphere.io.  Stratosphere.io is a web based terminal that has financial data, KPIs, links to filings, hedge fund letters, etc. Stratosphere.io provides clean data for segment data and KPIs, which are triple checked for accuracy. Stratosphere saves users time, enables easy comparisons between companies, and offers company specific metrics such as subscriber counts, numbers of locations, etc. Head over to Stratosphere.io for a free trial. Should you want to sign up for a paid offering please use the promo code BREW for 15% off. NOTE: Investing carries the risk of loss. Brandywine Global’s past performance is not indicative of future results. Detailed Show Notes 5:32 – How to think about credit generally 7:18 – What is a bond shell? 8:13 – The case for active management with credit 11:55 – How liquidity creates a cost of capital advantage for some companies 13:00 – Why high yield is no longer “junk” 15:45 – Company finance departments are better run than they were pre GFC 20:00 - Borrowing against assets and how professional it has gotten 22:35 - What The Fed cares about 27:30 - How retiring debt can help EV 30:00 - Some of the best capital allocators are in high yield 33:55 - How companies can manage our deleveraging cycle 34:50 - Why high yield hasn’t had back to back down years 38:00 - How the improvement in energy has benefitted high yield 41:45 - How Brandywine manages the quality of portfolio companies. 45:00 - How 2020/2021’s tech darlings can take advantage of today’s debt markets 46:30 - John’s take on private credit 49:30 - How tech could hurt private credit returns 54:30 - Long CEOs/short politicians 58:30 - How Brandywine manages their liquidity while running a open end fund 1:01:17 - How ETF transparency can create opportunities 1:03:00 - What type of investor is right for high yield 1:11:00 - How transparency can hurt liquidity 1:15:00 - Illiquidity and what it’s doing to the market