Grant’s Current Yield Podcast

Episode Title: LONG IN THE TOOTH
Date: September 16, 2024
Host: Jim Grant (A), Deputy Editor Evan Lorenz (B)
Guest: David Brezano (C), Head of Credit, Polen Capital

Episode Overview

This episode of Grant’s Current Yield features an in-depth, historically-grounded and wryly humorous discussion on the state of the credit cycle, the evolution of private credit, and where sophisticated investors can find real opportunity in crowded, hyper-analyzed financial markets. Jim Grant and Evan Lorenz welcome David Brezano of Polen Capital for a rich conversation on “long in the tooth” credit conditions, market inefficiencies, and the unraveling risks of the current lending landscape.

Key Discussion Points & Insights

1. The State of the Credit Cycle (“Long in the Tooth”)

• The credit cycle feels unusually extended: anticipated recessions keep failing to arrive, stretching market complacency and setting up possible surprises.

• David Brezano:

  “It's interesting compared with prior cycles in that the recession that hasn't quite happened, the downturn hasn't quite happened, has been predicted for longer than I ever recall in my career.” (05:05)

• Defaults are ticking up in leveraged loans, suggesting cracks below the surface despite tight spreads and apparent calm.

• The market is increasingly segmented and complex, with high yield, leveraged loans, and private credit all eclipsing $1 trillion individually.

2. Market Opportunities: Where to Lend Now?

• Polen Capital’s approach is bottom-up and opportunistic, harvesting value wherever risk-adjusted returns are most attractive: public high yield bonds, leveraged loans, or private credit.

• Portfolio flexibility allows them to pursue “the best yield per unit of risk” across and within sectors.

• The most fertile area: smaller, less-trafficked portions of the credit market—especially lower-tier high yield (single-B, triple-C) where regulations or institutional constraints keep large pools of capital out.

• Quote – On Market Inefficiencies:

  “Where we see those opportunities typically is in a mid to small cap space, little bit smaller transaction sizes because the big guys can't really participate there... Also we see value in the lower tier of the high yield market, single B and triple C rated bonds and loans.” (09:15)

• Many niche credits may be misrated or misunderstood, especially as ratings can become stale when there’s “no impetus to upgrade.”

3. Portfolio Construction & Risk Management in a Late Cycle

• Polen’s portfolios are more concentrated than major competitors, allowing for deeper diligence and conviction.

• Focus on companies that can withstand serious economic downturns: rigorous forward cashflow modelling, sector diversification, and stress testing for revenue declines.

• The team is “hyper focused on credit quality” and tail-risk scenario analysis, ensuring that selected credits can pay through cycles.

• Quote – On Stress Testing:

  “We can model out what we think the future cash flows should be...and then with sensitivity analysis, make sure that they can withstand a significant, a reasonably significant decline in revenues.” (12:26)

4. Examples of Market Misperception: The Meaning of Leverage

• Not all leverage is created equal. Two companies may have the same debt/EBITDA but fundamentally different risk profiles due to capital intensity, growth prospects, and the private equity sponsor’s equity cushion.

• Memorable Moment – “A Tale of Two Leverages”:

  “An example we like to use is...any company that has six times debt to EBITDA will receive a triple C rating...But there's a difference between that type of company and one where...a private equity firm paid 15 times EBITDA...there's a huge equity cushion there.” (16:24)

5. The Impact of Rising Rates: Floating vs Fixed

• Heavily levered companies with floating rate debt have seen interest expense double as SOFR/LIBOR shot up. Many now have only a 1x interest coverage.

• Companies with fixed-rate bonds issued during the post-COVID lows secured exceptionally cheap financing and are, for now, less stressed (but maturities loom).

• Opportunity arises in discount bonds: as fixed-rate bonds trade below par, investors may secure both yield and capital appreciation on pre-maturity refinancings.

• Quote – On Bond Opportunities:

  “When you have lower coupon bonds in a rising rate environment, the bonds traded down to a discount....If we can buy that bond at call it 90 cents on the dollar...there will be a pull to par as it gets closer to maturity.” (23:08)

6. The Private Credit Boom – From Niche to Mainstream

• Private credit, once a small, relationship-driven market, is now massive, more liquid, and increasingly institutionalized.

• Some functions now mirror the public markets: dedicated trading desks, even talk of ETFs built on formerly illiquid private loans.

• Jim Grant’s Classic Observation:

  “This once niche market, very one on one and private is now becoming rather more like public bonds.” (26:42)

• David Brezano:

  “All that money that's in private credit and also in loans is cannibalizing some opportunities that otherwise would have been in the public bond market.” (28:00)

• The public high yield market is higher quality than ever—double-Bs approaching 50%—because riskier deals are getting financed in private credit, obscuring systemic risk.

7. Risks Ahead for Private Credit: “Better Mousetrap” or Hidden Trouble?

• Private credit sponsors claim more protective covenants and higher yield for less liquidity. But the competitive hunt for deployment has eroded both.

• Many “private” deals are now multi-lender, multi-billion-dollar, and offer little yield premium to the public market—sometimes even fewer protections.

• Quote – On Private Credit Risk:

  “There's a high probability that it's of lower quality. And when the downturn and the defaults start to tick up across the board, that market might experience some unfavorable outcomes that might shock or surprise some of the limited partners.” (32:29)

• Expect the next downturn to expose the fragility of the private credit boom, especially among managers who stretched for risk or yield.

Notable Quotes & Memorable Moments

• “What really gets companies and the markets into trouble is when things are going really well and companies are trying to keep up with the competition… Here we've been anticipating this recession that just is always a quarter or two out into the future.”
  — David Brezano (05:05)

• “We are hyper focused on what really a handful of individuals who are not often unanimous will decide to do on interest rates. And at the end of the day… that's not the true driving factor of how one makes a return in credit.”
  — David Brezano on Fed-centrism (03:35)

• “As the money is raised, there's real competition to put that money to work... all that money that's in private credit is cannibalizing some opportunities that otherwise would have been in the public bond market.”
  — David Brezano (28:00)

• Grant (dryly, as ever):
  “David, I think there's a career for you in diplomacy if this buying low, selling high stuff doesn't work out. I like the way you phrase there might be a problem.” (35:16)

Timestamps for Major Segments

• Market Cycle & Fed Focus: 02:33 – 05:05
• How Polen Capital Finds Opportunities: 07:15 – 09:15
• Where Inefficiency Exists: 09:15 – 11:15
• Defense, Diversification, and Portfolio Construction: 12:04 – 16:13
• Example of Misperceived Credit: 16:13 – 19:34
• The Leverage Reckoning as Rates Rise: 19:34 – 22:50
• Fixed vs Floating, Pull-to-Par Opportunity: 23:08 – 26:42
• Evolution and Cannibalization by Private Credit: 26:42 – 31:50
• Risks in the Next Cycle for Private Debt: 31:50 – 35:44

Overall Tone & Takeaways

True to Grant’s style—scholarly, witty, slightly skeptical—the discussion refuses to take current market optimism at face value. Brezano’s analysis is calm, rational, and deeply informed by decades of cycles, always looking beyond headlines and into obscure corners for opportunity and risk. The underlying message: The most dangerous thing isn’t what everyone is watching; it’s the crowded trades and market evolutions happening just out of the limelight.

For further reading or to attend Grant’s Fall Conference on October 1st, visit grantspub.com/events.