An In-Depth Conversation With CPP Investments' Head of Credit Investments

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On Thursday, I had an in-depth conversation with Andrew Edgell, Senior Managing Director & Global Head of Credit Investments at CPP Investments.

Andrew and his team manage one of the biggest and most important credit portfolios among institutional investors in the world and I had a lot of questions pertaining to private credit which makes up the bulk of this portfolio.

I want to thank him for taking the time to talk to me and also thank Frank Switzer for setting up this conversation and sending me material before and after our discussion.

Before I get into my discussion with Andrew, his bio and a little more on Credit at CPP Investments:

Andrew leads the global Credit Investments department, which manages CPP Investments’ credit exposures across the spectrum, including term loans, investment-grade and high-yield bonds, mezzanine lending, structured products and other solutions for issuers across corporate, real estate and consumer sectors.

Previously Andrew led the Americas Structured Credit and Financials team where he was responsible for investments in sub-investment grade structured credit and debt capital solutions for financial institutions, as well as the intellectual property investment strategy. He has invested across industries and asset classes, including corporate and structured credit opportunities, and has represented us as a director on multiple boards.

Prior to joining CPP Investments in 2008, Andrew worked for Fortress Investment Group investing in credit opportunities. He started his career with KPMG on the Financial Institutions industry team, followed by eight years in the Corporate Finance group advising mid-market companies on M&A and financings.

Andrew holds a Bachelor of Commerce from McGill University. He is a Chartered Professional Accountant and Chartered Business Valuator.

CPP Investments' Credit Investments invests in four major areas: Capital Solutions, European Credit, Real Assets Credit and APAC Credit.

You can learn more about each area and where they have invested here.

I also think it is worth reading pages 56-57 of the Fiscal 2023 Annual Report which provide management's discussion on Credit Investments:


Here is the critical performance point:

Over the past five years, CI delivered a net return of 5.8%, a decline from the prior five-year period,  which was driven by widening credit spreads in fiscal 2023. Low default rates in corporate credit  investments, and the post-pandemic recovery in demand for real estate and consumer credit, positively contributed to CI’s absolute results over the five-year period.

Over the same period, CI generated a net value-added return of 3.0% above its benchmark, excluding  the impact of foreign currency. This was mostly unchanged compared to the prior five-year period.  Benefits from CPP Investments’ comparative advantages and CI’s underwriting discipline positively contributed to its long-term absolute and net value-added returns. The net value-added return over the five-year period was driven by selecting investments in real estate as well as corporate and consumer credit that have outperformed the benchmark.

Keep in mind that Credit Investments (CI) make up 13% of CPP Investments' total portfolio which make it a very important asset class.

Importantly, no other large Canadian pension fund has allocated as much to Credit as CPP Investments (or Private Equity which makes up 33% of of its total assets).

And just like the total portfolio, most of the Credit assets are in North America, specifically the United States across key sectors:

What else is important? I recently had a conversation with CEO John Graham going over their Fiscal 2023 results, and noted key investments Credit Investments made last fiscal year:

  • Committed US$350 million to Blackstone Credit’s BGreen III fund, an energy transition-focused private credit fund that targets global opportunities in a variety of sub-sectors including renewable power generation and storage, energy efficiency services, and critical energy infrastructure.
  • Invested US$148 million in the senior secured notes of Auna S.A.A., a leading health care service provider in Mexico, Colombia and Peru.
  • Invested R$200 million (C$52 million) in the debt facility of Rio Energy alongside Lumina Capital Management. Rio Energy is an independent renewable energy company in Brazil.
  • Invested US$200 million in an asset-purchasing vehicle with Gordon Brothers to acquire asset-backed loans originated by the company. Headquartered in Boston, U.S., Gordon Brothers is a global advisory, restructuring and investment firm.
  • Committed INR 18.5 billion (C$310 million) to the first close of the Kotak Infrastructure Investment Fund, which will provide senior and secured financing to operating infrastructure projects in India.
  • Invested US$75 million in a mezzanine loan backed by a sponsor-owned, Grade-A office and retail property in Shanghai, China.
  • Invested US$115 million in the second-lien term loan of HCP Global Ltd. (HCP) to support Carlyle’s acquisition of the company. HCP is a global premium cosmetics and skincare packaging manufacturer serving most of the top cosmetic companies worldwide.
  • Closed a C$230 million investment in the term loans of Legal Search, a provider of property- and corporate-related search services in Australia, the U.K., and the U.S.

And Frank Switzer sent me some more deals (there is overlap with annual report):

  • Expanded an existing relationship with Affirm, a U.S.-based digital and mobile-first commerce platform that provides installment loans for consumers to use at the point of sale to finance a purchase, for a committed capacity of up to US$1.2 billion in outstanding loan portfolio balance.
  • Invested US$40 million in sustainable home improvement loans originated by GoodLeap LLC through a one-time whole-loan purchase with capital managed by Blackstone’s Asset Based Finance Group. GoodLeap LLC is a sustainable home-solutions marketplace based in the U.S.
  • Committed US$350 million to Blackstone Credit’s BGreen III fund, an energy transition-focused private credit fund that targets global opportunities in a variety of sub-sectors including renewable power generation and storage, energy efficiency services, and critical energy infrastructure.
  • Invested US$148 million in the senior secured notes of Auna S.A.A., a leading health care service provider in Mexico, Colombia and Peru.
  • Invested R$200 million (C$52 million) in the debt facility of Rio Energy alongside Lumina Capital Management. Rio Energy is an independent renewable energy company in Brazil.
  • Invested US$200 million in an asset-purchasing vehicle with Gordon Brothers to acquire asset-backed loans originated by the company. Headquartered in Boston, U.S., Gordon Brothers is a global advisory, restructuring and investment firm.

Discussion with Andrew Edgell, Senior Managing Director & Global Head of Credit Investments at CPP Investments.

Alright, let me get to my discussion with Andrew because it was a long one (45 minutes).

Andrew began by giving me an overview of last fiscal year:

Last year was a good year, it was a solid year, but just to provide context for the results because I think this is important for portfolio construction. We are being asked to deliver credit exposure to the top of the fund and we've been building the portfolio since 2008 to do that and we have done it through this multi-strategy global platform. We have people in four different offices globally. We are targeting those countries where there is bankruptcy law and an investible universe for credit investors. And flash forward since I joined back in 2008, we have now built a portfolio that is CAD $58 billion  (as at March 31st, see annual report figures above). 

As you pointed out, we own Antares, that is in that portfolio. We own 83% of the equity in Antares and that has been our best investment across the firm since we bought that in 2015 (no doubt, it is their best investment ever). So that's performing quite well.

It's important to note that 18% of our portfolio -- I think that's the today number but order of magnitude 15% -- is in our public credit group which is liquid, it's lower yielding, it serves a balancing purpose for the credit department but also for the Fund overall.The balance is in high-yield, non-investment grade credit and that combination of investment grade and non investment grade is the type of exposure that Ed Cass, our CIO, would be modelling to determine how much of that credit exposure he wants.

With that context, the 7.3% CAD returns in fiscal 2023 at year-end March 31st was strong but it was really helped by currency. 84% of our portfolio is in US dollars and over that period the CAD depreciated 8.4%. So, the US dollar obviously helped us and because we are in a lot of non investment grade credit during a period where we had increasing rates and increasing spread, on a local basis the returns were lower but we manage our business and measure performance over the long term over the five years, we are still running 300 basis points above our benchmark -- that benchmark being a mix of local and global bond indices -- so as a department we feel very good about the strategy and how it's playing out, so we're driving forward.

[Note: their benchmark isn't public but Frank emailed me: "It’s not public because our focus is on disclosing a benchmark for the entire Fund.  However, to provide you with a bit more colour, here’s a broad description of the benchmark for Credit Investments: For multi-asset strategies, we use a weighted blend of four indexes – global aggregate investment-grade corporate bonds, global high-yield corporate bonds, U.S. leveraged loans and emerging market bonds. For a major single asset holding, we refer to a U.S. large/mid-cap equity index.]

You pointed out it's a diversified portfolio and that's absolutely the case. It's interesting, last year, looking at which assets performed the best, certainly the assets that are most correlated to public indices --public credit, high yield bonds -- the more liquid securities -- those performed relatively poorly because of spreads widening and rate increases that I mentioned. 

Then I looked to the assets that we have and I was quickly drawing up a list of the less correlated that we have like in sustainable energy which has a commodity angle to it, emerging markets, life sciences investments including royalties, our infrastructure assets and our credit opportunities which are more special situations and opportunistic. Those are the strategies that performed the best, and that speaks to the value of that diversification and I'm not expecting all strategies to perform well in any given year but on balance it's been working for us.

And then Antares had a phenomenal year. One of the things they have been doing over the last three years is really building out their third party asset management business, raising funds for private capital from institutional investors globally, including ourselves, we put some money into the fund. That has provided a diversified revenue stream for them. At the same time, because they are a big balance sheet lender, with rates going up, they benefited from higher gross net income. So, they actually had a phenomenal year and their results reflect this.

I interjected and said that John Graham who used to run Credit before Andrew told me that Antares is singularly focused on mid-market lending as that is their bread and butter business. I noted that IMCO invested $500 million with them and so did BCI (not public but they did) and the firm is very well known and they also raised from other global institutional asset managers. There is a credibility and track record built over many years.

Andrew agreed:

Absolutely, this is what attracted us to them in the first place, is they built a franchise as the largest non bank LBO finance business focused on the mid market.  They have really long standing relationships and origination team connected to mid market sponsors. They partner with them in a true sense. They are with them on transactions, they tree up and have multiple teams running with them on transactions with different sponsors, and that gives them the opportunity to dictate pricing and terms. And with the diversified business model where they have a balance sheet to hold risk when they think it's prudent, they have a syndication business  so they distribute risk when it's prudent and they have a third party asset management business to generate fees. They are really leveraging their comparative advantages in that franchise in the mid market LBO, that's for sure.
The sponsors are private equity firms, and since CPP Investments is a huge investor in Private Equity, I asked them if they force PE funds to work with Antares. Andrew said no, explaining:

We keep that separate. And actually, one of the ways we co-exist with Antares because as you know, we have a big direct LBO finance business on balance sheet at CPP Investments, is Antares is focused on the mid market. So there ends up being some overlap on the edges where you get companies that  transition phase or mid market or smaller cap companies that grew up with Antares and now are just bigger because they've grown, we get a little bit of overlap but what we have found is we work closer with Antares to provide a better capital solutions for the issuer.
I then shifted my focus to sector diversification and asked him where they lost money last year, specifically focusing on real estate:

Real estate is a really good one to focus on and we didn't do as poorly as you might expect there. It's an extremely diversified real estate portfolio so we are in retail, in office which is the one which is most hardest hit, we are in warehouses, multifamily, healthcare, it's quite diversified. To a position, we go through that and make sure it's written down to fair market value at year-end.  We do that exercise very deliberately and with a lot of rigor, this year especially because of what is happening in the market, and it didn't perform as poorly as you might think. 

Where we got hurt was on the higher beta or lower rated liquid securities where because the market traded off, the lower rated securities traded off more - they were higher beta meaning they responded more relative to market moves.On a marked to market basis, those strategies -- the public credit and high yield strategies -- got hurt the most. But we feel very comfortable where we are positioned. In some cases, on the trade down, we bought more of that paper. We are constantly re-underwritng the position and looking for opportunities to trade out of securities. We really run the book as an investment portfolio, not a loan to maturity type of portfolio, so if we see instances where we can liquidate a position even if it's a loss in order to put that capital to invest in something that can prospectively earn a higher return, we will do that. 

I asked him how he positioned the portfolio in what can be a much more volatile 2024:

Well, as you know, everyone is talking about it expecting a recession, and I would say maybe that will happen, speaking probabilisticallly, I think it will happen. I think governments are in this fight with inflation to win as they have too much to lose if inflation persists. I think we are in a period of higher for longer -- that's not only my idea but that's the camp I'm in.

But the reality is we are careful not to take a conviction side to the prediction. We stress test all of our positions and then stress test the portfolio. At a high level what I'm trying to do as department head and portfolio manager is stress test the portfolio and go into situations where the skew of potential outcomes is more positive than negative and over the long run, that has tended to be a wining strategy. 

But as I think about the environment, I thought I'd share with you  a couple of observations from our portfolio and what we are seeing in the market based on others' research. In the US, high yield issuers, revenue and earnings growth are decelerating but it's still growing. In the EU, earnings growth just only flipped negative recently but up until recently, was still growing, top line is still growing but at a decelerating rate. So how big a recession we expect to have is still a TBD (to be determined).

But what I'm most worried about of course is the impact of that on defaults and on that there are a few interesting things to keep in mind as you assess how deep it can be on the default cycle. I was just looking at some JP Morgan research. If you look across the US high yield and leveraged loan issuer market, so this is non investment grade issuers, we have eight consecutive quarters of positive revenue and earnings growth. Many issuers are growing into their higher debt service, so even though rates are have gone up, they are growing into it. 

I was on a panel in 2021 and at the end of the panel, there was one of those lightning rounds, we were pushed to make a prediction as to when the recession will come, they want down the road and I was third. The predictions were first quarter 2022, second person said third quarter 2022, and I had to provide the caveat that I don't make predictions and said fourth quarter 2022. I feel like a recession is at least three months away for at least three years.

In any event, the other thing we've started to see is debt service coverage ratios have started to decline but again only recently. If you look by historical standards, they are more than a full turn higher than 2008. Similarly, leverage ratios have declined for eight consecutive quarters and this is because there has been growth and that is helping companies position well. 

In our own portfolio, we haven't started seeing any meaningful drawdown in revolver drawdown which is often another signal in how much heat companies are feeling. This is one way of saying the universe of leverage this year is better than what one might expect. It defies my own intuition but we like to pay close attention to that data.

I told Andrew that I'm an economist by training and a good economist who understands the links between markets and the global economy, and when John Graham came to town last year, I told him I fear that the next recession will be deeper and more prolonged than anything we've experience since the 70s or early 80s.

I added that for me, debt servicing works as long as consumers have jobs but once that goes, it will be painful, and I mentioned Francois Trahan's charts below:

I told Andrew I believe we are at a very important inflection point. I read that during the pandemic, a lot of US homeowners took advantage of record low rates to refinance their mortgage and that might explain why the rise in rates hasn't affected them yet.

But I told him the rise in rates is impacting corporations and their debt servicing costs are going up and if it hurts earnings, they will need to cut costs (ie jobs). Moreover, there is tightening of lending standards and this impacting smaller to medium sized enterprises (SMEs) which hire most of the people.

That got me back to Antares and a discussion I had last week with UPP's CIO, Aaron Bennett, who told me they inherited a portfolio of private debt and PE managers and weren't keen on deploying new capital in that space. Aaron also rightly noted that private debt feels very much like real estate and infrastructure 15 years ago and the asset class hasn't gone through "its existential moment" and experienced a full cycle yet.

I also noted there is a lot that worries me about private debt, I wrote about it here at the beginning of the year and said a lot of the newer funds do not have good risk management, underwriting standards and put in a bunch of junior debt in their unitranche loans and if that blows up, the industry fallout can hit CPP Investments as well. 

Moreover, some private debt funds are now putting up gates, effectively barring their investors from redeeming. That too makes me nervous.

Having said this, I also mentioned a recent comment of mine of why it's private credit time to shine, going over the insights of Blackstone's Brad Marshall.

Lastly, had I had the chance, I would have brought up this research showing many PE firms are not properly hedging their soaring interest costs:


But Andrew did reply to my concerns:

There's no question private credit is expanding. I think the numbers are private debt estimated at US $1.5 trillion and that puts it at roughly the same size as the broadly syndicated loan market. This is more anecdotal but the middle eastern funds are starting to allocate more in this area and we are expecting further flood of money and funds raised for private credit is expected to continue to grow. And insurance companies are also looking at private credit.

In addition to that, private credit n longer just includes corporate credit, it includes asset backed credit like structured credit which is something we've been investing in for years now.

There's definitely a shift there. Goldman did some work on it recently and was highlighting that at least in 2022, the money moving to private credit was coming from a rotation out of equities, so it's not a rotation from public credit into private credit. And this is all happening at a time when the LBO and M&A market is shut down because of the rate volatility and spend volatility, that market is ground to a halt. 

There's currently a lot of demand for that type of credit and not much supply. I'm very focused on that right now. The supply side of it is cyclical, there will come a point where bid-ask spread narrows as PE firms start to transact again and there will be some product to fill up those funds. 

But your point is not lost, there's a lot of money being raised. Now, a lot of managers out there are very sophisticated investors and I think they'll do well. There are a lot of attractive aspects of private credit as an investor. We still look at it as something which will be a very important part of our portfolio so we will continue to focus on it.

However, the other part of your point is bang on. There are a lot of smaller funds and funds that are newly formed that probably have the opportunity here because over the last ten years banks have been moving out of the space and it's no secret that a brand new private credit fund isn't going to have the same risk, oversight, governance, procedures etc. as a bank might.

Now, I think there are some important counterpoints. Since the GFC, for example, there's been quite a bit of discipline in the corporate credit market, even the leveraged loan markets. The coverage ratios, the yields to the total debt that companies are being capitalized at are actually lower than they were back then. The other point is there's much less leverage in the system.

In addition to that, private equity firms have raised so much money and have so much dry powder learned this through the depths of the pandemic, they're willing to use that capital to protect their companies. 

You obviously follow the trend about covenants. Around the GFC, there were many covenants and now there are effectively none. Ironically, that's giving PE firms more option value and more to fight for if they can help companies through temporary liquidity squeezes. 

These are just observations, how they play out if we go through a deep recession is TBD (to be determined), I hear you on that front, I'm not going to predict exactly but we are monitoring all these countervailing factors. 

He made a good point, when dislocations happen, PE firms flush with dry powder will put equity to work and there will be product for private debt markets (ie. supply will increase).

I then moved on to another area that makes me nervous, the looming commercial real estate crisis giving rise to another credit crisis. I told him the regional bank crisis isn't over, there are still a lot of outstanding CRE loans that need to be serviced and people are telling me banks are trying to hide these loans till the fall where they will have to take major writedowns and that will be a potential credit event.

Andrew replied:

We are really on top of this. I thought you might ask me about what opportunities we are positioning for and the number one I had on my list was US regional banks and the implications there. It's not going to play out quickly. The FDIC has given them all a stay of execution putting in place liquidity facilities and no one wants a fire sale. But what's happening right now is everyone is waiting for regulations. 

So what happened with Silicon Valley Bank, First Republic and others has raised the level of scrutiny by the regulators and certainly US regional banks have gone into risk off mode. Deposits have been flooding out of the system, some into money market funds, some under mattresses and some into larger banks. But even the larger banks are waiting for regulations and there's a reasonable view that these regulations will end up costing the big banks as much as it costs the regional banks. 

So they need to shrink their balance sheet and it's just a question of how quickly the FDIC facilitates that and will it play out over many years.

We are currently of the view it will play out over many years but some of these banks over the last ten years have looked for ways to increase their ROEs and have gone into more esoteric asset classes, not completely unsafe but just different in what you'd think a bank is in. I think those will present opportunities for us whether it's around non agency mortgage loans in the residential side, or other consumer credit or construction loans and things like that. We've seen some of those portfolios trade and I think over time, they will look to sell those portfolios or work with institutional investors to help facilitate them to still be in the business and we think that will present opportunities and we have a lot of institutional knowledge around real estate.

The other thing which is really compelling and I don't know ho wit manifests itself but the numbers are stark, you've got 60% of commercial real estate lending in the US is done by banks and about 2/3 of that is done by regional bank and if you dig deeper into construction financing, 80% of construction financing is done by regional banks. Intuitively it makes sense, you have a local bank officer who knows that piece of land can turn into something and willing to support it.

But nevertheless, they're now out of that business, at least temporarily, waiting for the regulation, waiting for their liquidity profile to free up. We are looking at that wondering if there's a good opportunity to backfill and I think you may see a lot of the private credit markets turn their attention to that. That's in part the asset-baked finance side of private credit that I mentioned, so there's the corporate LBO private credit and then there's the asset backed private credit.

I told him that's very interesting because Citadel founder Ken Griffin said last week they are ramping up credit trades, anticipating a recession, so if CPP investments can do these trades directly or with partners, they should seize on the opportunities.

Andrew answered: "That's right, if you can make 10-12% return and be at the top of the capital structure, then why wouldn't you do that?".

Given my fears of recession, I asked Andrew if he knows what Antares has in junior debt and the junior debt in his total portfolio:

We have it split similarly across different parts of the capital structure.The first-lien part of our book is roughly 20% and the rest would be mezzanine or junior, we got 2.6% unitranche. Antares as I mentioned before, if you're looking at heir book, it's 30% unitranche but otherwise it's all first-lien (98% first lien which includes some unitranche first-lien).

Andrew spoke more about unitranche:

I read your article with great interest and I think you make some great observations about disclosures. For allocators, you need to consider that and know what you're buying. We are generally not investing in corporate credit funds. We do use partners in certain more esoteric asset classes or in certain regions of the world like emerging markets, and directly we have less than 3% in unitranche in our balance sheet.     

Notably, unitranches aren't new. I was there when they were structured back in 2006-7. There's a lot of reasons why they are a good product for issuers and have attracted a lot of private capital from investors, so I don't expect them to go away. I think the question is are they priced correctly for the risk? This is something investors should always be asking. 

They have become a lot more pervasive. A lot of the money being raised around private credit, there are big allocations of those private credit funds going into unitranches. There's no question they're more leveraged than a typical first lien but from our observations we are not seeing anything systemically risky there and I'll give you a few reasons as to why.

One is they tend to be replacing first lien and second lien structures so for the issuer there's no incremental leverage versus the alternative and in many cases the unitranches have less leverage than if they want down a syndicated first-lien and second-lien or first lien in a high yield structure. They're also first lien in the entire tranche so there's no unsecured component to them per se. And total LTVs (loan to value) are still pretty healthy and as I mentioned earlier have been declining last eight quarters.

So, if you look at a single unitranche, if you have a default on that single deal, there's no question your recovery would be lower than if you had a first-lien, it's just a matter about how much leverage you had in a single business. 

But when you think about putting unitranches into a portfolio and let's say you had a portfolio of unitranches, there a re few things that are quite compelling. One is we can hypothetically bifurcate the unitranche to attribute return to the junior and senior portion and compare that to what we might get if we had a first-lien and a second-lien as a separate security. 

At least right now, unitranches are pricing with a slight premium there so from a yield perspective, for a certain amount of leverage, you're actually getting incremental yield to cover you for losses in a portfolio. And then untiranches versus first-lien also have call protection generally or prepayment penalties so if you think from a portfolio perspective, if you have prepayment penalties, you have upside convexity, a little bit more upside beyond getting paid back par on your typical first-lien. So when you're thinking about a portfolio of unitranches interacting together, you're getting a little bit of incremental spread, you've got a little bit of upside, yes you have to manage some defaults but overall it looks like a pretty attractive risk-adjusted return. 

Then you layer in the fact that if you're in the first-lien, you have an appetite in your fund for more junior in the capital structure, then doing it this way as opposed to being in the second-lien let's you control the capital structure so you only have one lender or a small group of lenders providing that unitranche and if things go wrong you get to the table and have a lot more control over your debt.

It's a long way of saying that unitranches do play a role in the portfolio but n the point of transparency and whether or not asset allocators know how much junior debt they have in their unitranches, I can't speak to that but it's a very good point you're raising.

I told him so this isn't 2008 where we had CDO-squared and CDO-cubed structures, to which he replied:

Yes, this isn't leverage on leverage. The other thing is in corporate credit generally, the underlying asset and the value of that underlying asset has some connection. There's still discipline in the lending markets in underwriting debt. Yes there are some adjustment but the value of the business is tied to something based n reality, ie the cash flows and earnings of the business. Not to mention you usually have a sponsor there that is vetting that. Whereas in the GFC case, not only did you have leverage upon leverage but the underlying assets had nothing to do with the cash flows, it was a completely fictitious value based on an inflating bubble. The corporate market has a very different structure.

I agreed but made the point the big difference back then is rating agencies could rate the paper even if they didn't do their job whereas right now, they can't rate private debt so there's no independent credit rating agency that can rate the funds.

Andrew replied:

I think that's a fair observation because the ratings are certainly not public. You have to go institution by institution. For example, here we either shadow rate or there was a private rating available to lenders when we entered the deal, so there is some oversight, it's just not public.

He added: "We have a Risk Group here that rates every transaction."

He also explained how the organization significantly beefed up risk in fiscal 2023: "John hired a new CRO (Chief Risk Officer), Kristen Walters, and separated risk from the CFO's duties."

I think John Graham made a very wise move there and this will bolster this important fund for decades to come.

One again, I thank Andrew Edgell for taking the time to speak with me and providing such in-depth insights on Credit Investments' approach and investments and insights on trends in private credit. I also thank Frank Switzer for setting up this call and providing me with material.

If you want to understand the success behind this blog, it's because of nice people like them who take the time to contribute their incredible insights.

Below, John Graham, President & CEO, CPP Investments speaks with Bloomberg’s Matt Miller at Bloomberg Invest New York. Take the time to watch this interview.

Also, Chris Harvey, Wells Fargo Securities head of equity strategy, and Frances Donald, Manulife Investment Management chief economist and strategist, join 'The Exchange' to discuss the case for a recession in the back half of this year, and the rationale behind the Fed's pause. 

Donald is very worried about 2024 and if the Fed maintains its efforts to lower inflation to 2%. On Thursday morning, she told Lisa Abramowicz on Bloomberg Surveillance that "we're headed into an environment where 2-3% inflation, in our view, will become the norm."

My take: I'm not convinced supply factors have structurally changed inflation for good and 2-3% is the new norm (China slowing is deflationary), but if the Fed is hellbent on lowering inflation to 2%, then you can be sure we will experience a deeper and more prolonged global recession. 

Lastly, Jack Farley speaks with two veteran bankers about bank lending, a key engine of the real economy, and where it is headed. John Toohig, Head of Whole Loan Trading at Raymond James, and Randy Woodward, managing director at Raymond James, join Forward Guidance to share how the rapid surge in interest rates has drastically changed the math for community and regional banks. Now that deposits are no longer free, banks must charge far higher rates on their loans (auto, mortgage, commercial, commercial real estate, etc.) in order to earn a commensurate return.

Toohig notes that some that banks have NOT yet sufficiently raised their loan yields, to account for this surge in cost of funds. There are two potential reasons for this: first, loan officers are making loans that may not make economic sense because they are incentivized to do so and/or it is to a key client relationship; and second, because many in the banking industry expect that the Federal Reserve will lower interest rates which will put a ceiling on funding costs. However, bank regulators (such as the FDIC) may be in the process of forcing some banks to realized losses. Filmed on June 8, 2023.

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