Hi, my name is Chad py and I'm a portfolio manager here at Bexar Hanley. So I wanted to talk to you a little bit about the third quarter of 2022. What happened from a headline perspective, what it meant in terms of performance for the quarter across high yield as well as leverage loans portfolio got investment grade as well. And then finally, a little bit about positioning in terms of where we think you ought to be in the quality spectrum. So first, in terms of the headlines, the Federal Reserve was probably the most important one. They hiked rates by 75 basis points twice, of course, on the heels of a 75 basis point rate hike closing out the end of the second quarter of 2022. And then, of course, as you come to the beginning of this quarter, what you find is we have a CPI print that's still quite high. The expectations of the Fed's going to have to actually raise rates by 75 basis points at this next meeting. After that, we'll have to see from the evidence perspective, but it's entirely possible, based upon these CPI prints that we're seeing and the degree of inflation in the economy, that you'll actually see another rate hike of similar magnitude. The second set of headlines was actually a really interesting one, quite unique. Basically, the Bank of England said it was stepping in to buy gilts. And what we found out post quarter end what happened was a number of UK pensions had made rate bets. They ended up being margin called on those to meet margin. They ended up selling a lot of fixed income assets and the result that caused some repricing across the market and it caused a bit of a risk off mentality. And so there's probably no better way to really understand what all that meant for the markets than to look at the actual performance of the asset classes. And so we take a look at investment grade. It was off about over 5% for the quarter. Obviously, based on what the Fed did with its rate hikes, that was a large driver of that return number. In terms of high yield leveraged loans, you actually saw high yield at about 70 basis points. You saw leveraged loans actually up about one, almost 1.2% during the quarter. If you dig a little bit deeper, you actually see some interesting undertones that were occurring at the time. Of course, you had a risk off environment at the end of the second quarter of 2022. As you enter the third quarter of 2022, you saw a bit of a risk on mentality such that double B's, single B's and triple C's by quality across high yielding loans actually outperformed. What's interesting is as the quarter progressed, you actually saw by quality kind of a petering out where the lower quality rungs started to underperform such that when you entered September that risk off environment, particularly with the headlines around the Bank of England as well as these UK pensions, you actually saw triple C's trade off much more so than double B's, whether that's across high yield or leveraged loans. And so how should you position for this? Well, we're staying up in quality. We certainly like the fact that on the high yield side, the double B's, you have more of a locked up rate structure for companies. In fact, you're at record lows in terms of interest rate sensitivity as it relates to the type of capital structure we've locked in financing fixed rate exposure with double B's there. So we say stay up in quality. You also get the benefit of a better cash flow profile, usually better scaled companies in terms of size. On one side, it's the same story. Stay up in quality with double B's, better cash flow coverage potential as rates rise, better ability to service those that interest costs. And so the other thing that we're taking a look at is rotating out of those sectors that have stayed relatively tight, spread perspective and rotating into those that have a little bit more price upside. So one example of that would be taking a look at the energy sector that's actually been an outperformer this year. Spreads have stayed tight and rotating out of that into something a little bit more convexity, a bit more upside. Basically the cable space, for example, where you can pick up pretty large discounts and business models that have really good cash flow despite the elevated CapEx we're going to see for the next few years. And Thank you. I really appreciate you all taking the time to listen to our third quarter of 2020 to leverage finance update.
