Mark Boyadjian oversees the Franklin Floating Rate Debt Group, which manages $5 billion in assets, for Franklin Templeton Investments. Registered Rep. spoke with him about the current credit crisis.
Registered Rep.: You say the current credit crisis is more of a liquidity event than a fundamental credit or business event. Why?
Mark Boyadjian: Technical factors, as opposed to macro credit issues, have really contributed to the recent downdraft in the credit markets. What the credit markets didn't anticipate is how interconnected and leveraged some of the participants were. As a result, the entire supply/demand balance for credit risk was violently disrupted. This de-leveraging also impacted the demand for collateralized loan obligations — a primary driver of demand for bank loans in our markets. Combined with the record level of new loan issue supply, there really was only one direction for the market to go.
While painful for investors in the short term, we believe this correction is ultimately healthy for the market and offers a long-term opportunity to gain exposure to the asset class at very attractive levels.
Also, going forward, arrangers are likely to be more methodical and disciplined in how they market and underwrite supply, and we expect to see less aggressive, borrower-friendly issues.
In the meantime, the macro credit fundamentals remain in place for the market as a whole. Clearly, there are some risk factors that were not present before — like the decline in liquidity and increased premiums for credit risk — but the companies we're investing in continue to perform as expected and default rates in the overall loan market remain near all-time lows.
RR: I understand that you take a more conservative approach in managing this fund and that you don't invest in derivatives. Why?
MB: This fund seeks to deliver low principal volatility and high floating-rate income. To do that we invest primarily in senior, secured corporate loans with floating-interest rates. We focus exclusively on senior secured floating-rate bank loans. We do not invest in derivatives, and we do not leverage the fund. We prefer to focus on stable growth prospects and avoiding default.