Jul 15, 2020, 4:33 PM ETConference Presentation, Panel, Fireside Chat

Opening Plenary | Part 2: Capital Markets in a Time of Global Disruption

Equity Markets: Priced for a V-shaped recovery with valuations at historic highs across price-to-book, enterprise value-to-sales, and P/E metrics.
Debt Markets: Display significant skepticism regarding the recovery, particularly in high yield and double-B segments, creating a divergence where debt is trading at a discount to equity.
Historical Divergence: For the first time in decades, equity markets are leading the valuation recovery while the high-yield bond market lags, contrary to the typical 2008-2010 pattern where bonds led stocks.
Risk Profile Shift: The loan index contains fewer double-B rated securities than the high yield index, a reversal of the 2008 dynamic; today's loans are described as significantly riskier than prior decades despite appearing cheaper.
Margin of Safety: Double-B loans currently offer approximately 30% loan-to-value and a multiple over the risk-free rate, presenting a historically sound margin of safety compared to equities.

Legacy RMBS: Significant opportunities identified in legacy residential mortgage-backed securities (RMBS) due to a reset in equity cushions, now at 35-40% versus 5-10% in 2008.
Valuation Correction: Legacy mortgage values dropped from 95 cents on the dollar to 50 cents, driven by irrational backward-looking fear rather than current fundamentals.
Cash Flow Coverage: Current equity-to-payment ratios are roughly nine times, suggesting a high probability of borrowers servicing debt or selling homes to avoid default compared to 2008.
CLOs vs. Underlying Assets: While CLOs face high complexity and lower upside, the underlying loan assets within them offer better value; AAA/AA CLO tranches showed smaller price declines than the underlying risky loans.
Sector-Specific Plays:
- Boeing: Recapitalized itself via private markets after government confidence was restored by the Fed's corporate bond purchase program, avoiding a potential $75 billion bailout.
- Hospitality: High-end hotel sectors (e.g., Marriott) secured additional liquidity and saw equity appreciation after tightening loan-to-values significantly.
- Cruise Industry: Remains a higher-risk outlook due to uncertainty regarding the ability to resume sailing operations.
Municipals: Tax-free opportunities identified in special-purpose financing for municipalities and hospitals, offering attractive total returns with tax shields.

Public-Private Partnership: Contrast with the 2008 crisis where governments were suspicious of private sector involvement; today, governments actively seek private sector ideas and support.
Infrastructure Proposal: A "Build America" style proposal suggests the US Treasury could support $4 trillion in infrastructure spending with only $1 trillion in direct government funds via 100% coupon subsidies.
Speed of Response: Government intervention (Fed, Congress) has remained "ahead of the curve," executing faster than the delayed response seen in the 2008-2010 period.
Swiss SME Facility: Credit Suisse partnered with the Swiss government to create an initial $20 billion facility, doubled to $40 billion, allowing online credit disbursement to SMEs and restaurants within minutes.
Regulatory Cooperation: Crisis conditions forced global regulators to abandon strict ring-fencing, enabling banks to extend liquidity across borders to support multinational clients.

Remote Operations: Over 90% of employees worked from home seamlessly; trading desks maintained execution capabilities and client relationships without physical proximity, utilizing advanced technology.
Client Liquidity Management:
- Wealth Management: Clients met margin calls by providing creative collateral; the firm handled intense volumes while maintaining long-term relationships.
- Private Equity: Increased interest in "going private" transactions to capitalize on public market volatility and undervaluation.
- Repricing: Firms shifted from defensive liquidity needs in early crisis to offensive capital raising and restructuring in the second round.
Employee Contracts: Unprecedented conditions prompted a re-evaluation of the "social contract" between employers and employees, with a structural shift toward permanent remote work flexibility.
Long-Term Strategy: A "new contract" is expected between banks, governments, and economies to re-establish trust and define new operating models post-crisis.

Actuarial Pressure: Low yields on government and investment-grade debt make it difficult for pension funds, insurance companies, and endowments to meet historical return assumptions.
Public vs. Private Valuation:
- Technology: Public markets may now value tech companies higher than private markets.
- Disrupted Industries: Private markets may value travel, cruise, and hospitality sectors lower due to uncertainty, creating arbitrage opportunities.
Structured Solutions: Focus on creating non-indexed securities and structured products to generate returns superior to standard bond indices.
IPO Innovation: Exploring mechanisms beyond traditional IPOs to monetize private assets, aiming to capture the 20-30% valuation gap between private and public markets instantly.
Boeing Returns: Specific tranches of Boeing debt issued in April 2020 generated 7% returns on 3-year bonds and 22% returns on 40-year bonds within the holding period, trading at 120% of par.
Patient Capital: Emphasis on the need for more patient capital to fund long-term socioeconomic infrastructure shifts, with a specific focus on Asia where multi-generational entrepreneurs remain privately focused.