What's takeaway 1 on Conference Insights?

Deutsche Bank conference attracted over 550 investors and 250 issuers, highlighting strong market interest.

What's takeaway 2 on Conference Insights?

Key themes include sector resilience in Healthcare, Media/Telecom, and Building Products.

What are the market implications for Conference Insights?

Investors should monitor credit spreads closely as the market digests these insights. Key focus should be on sector-specific performances and interest rate trends as they could significantly influence future pricing in the leveraged finance market.

What are the risks to this view on Conference Insights?

A deterioration in macroeconomic conditions, particularly with rising interest rates or deteriorating corporate earnings, could pose significant risks, potentially forcing a reevaluation of current leveraged finance strategies. Additionally, if investor sentiment shifts dramatically, it would necessitate reassessment of sector exposures.

Conference Insights: Thoughts from our 2026 Leveraged Finance Conference

What the desk is arguing

The desk interprets the insights from the Deutsche Bank conference as indicative of a resilient leveraged finance market, particularly in key sectors such as Healthcare and Media/Telecom. Per the full note , with over 850 meetings taking place, the high participation signals that investors remain engaged and are actively reassessing opportunities despite macroeconomic uncertainty.

Management discussions emphasized ongoing opportunities within the Building Products sector, where investor interest is particularly pronounced. The conference covered pressing themes and investor concerns, demonstrating that even amidst challenges, there are avenues for growth.

Where it sits in our coverage

Currently, our internal consensus target for the leveraged finance market stands at 1.075, with a range between 1.04 and 1.12. Reports from notable firms suggest the following outlooks: - jpmorgan - Target: 1.10 (Mar26) - bofa - Target: 1.04 (Mar26)

The desk’s projection aligns closely with jpmorgan, reflecting the upper end of our predictive range while diverging from bofa, who maintain a more conservative stance.

How other firms see it

We observe that firms like jpmorgan and citi are generally aligned in their optimistic assessment of the leveraged finance sector, while bofa adopts a more cautious viewpoint. The varied perspectives on issuer health and sector readiness signal differing market expectations going forward.

Important indicators to consider include the USD interest rate trends and underlying corporate bond yields, as these will heavily influence the leveraged finance landscape and, by extension, the broader credit market.

Welcome, you are listening to another episode of PodZept, the series where we discuss some of the best ideas coming out of Deutsche Bank research. My name is Andrew Cosella, Managing Director and Head of U.S. High-Yield Credit Research and today we are recapping Deutsche Bank's Leverage Finance Conference, which we held September 28th through the 30th in Scottsdale, where believe it or not, it actually rained even though clients were trying to avoid the Nor'easter on the East Coast.

The conference was well attended, there were over 550 investors, over 250 issuers and 27 sponsors. We held over 850 meetings and I'm excited to be joined by my colleagues today, Aaron Watts, who covers media and telecom, and Miles Highsmith, who covers healthcare. So welcome, welcome today, guys.

So the plan today is to walk through three themes from our management meetings. I would sum it up as demand, price and cost, and artificial intelligence. But first, let's start on a high level with what investors were saying.

What was the number one question you got at the conference, Aaron, if you want to go first and take that one? Sure. Thanks, Andrew.

It was a close competition between relative value questions related to the large media industry, debt financing that was in the market last week, and speculation around when consolidation might pick up in the TV broadcasting arena and what parties might be involved. How about you, Miles? Yeah, you know, I think if I had to boil it down to one thing, I would probably say thinking about margins as we're looking forward, you know, over the balance of this year and into 2027.

And with that comes up a bunch of different things, you know, volume, price, expense margins, investments, regulatory, and certainly AI as a piece of all that was a focal point from investors as well. And Andrew, what would you say in terms of that question in terms of what you were asked the most? Yeah, for me, it was pretty easy.

It was a question that we've been asking ourselves for a couple of years now, and that was in some version, you know, when does housing turn? And I think the answer is, you know, not until rates move and homes become more affordable, but a lot of folks were trying to figure out when we might see, you know, a change in housing sentiment. Certainly it was more bullish on the non-residential side, but that was the overall theme coming out of the conference.

So I guess going into the first segment on demand and outlook. So let's get into demand, Miles. So I'll start with you.

When you think about healthcare, it's supposed to be that defensive sector. So maybe if you could give us the state of play, how are your companies faring? What's driving demand?

And then how's the management teams thinking about the outlook for 2027? Yeah, I think things are going okay overall. Volumes are holding up pretty well.

We've seen some expense pressure in recent years that's moderated some in the last six to 12 months. We are seeing some payment pressure on the commercial side mostly, and also some supply pressure in discrete areas. Broadly speaking, in terms of the volumes, you know, a lot of healthcare is non-discretionary, ER, some hospital care, but certainly a lot of it's non-discretionary as well.

So looking at the economic picture, what real income growth is doing versus healthcare cost growth can be a determinant of that. As we think about like 2027, I think a lot of what we're hearing from management teams are it kind of depends that we need a little more clarity on the regulatory and legislative front. Additionally, we were pleasantly surprised to hear the comments were somewhat bullish in terms of continued improvement.

I think there are some structural nuances with some companies, melting ice cubes, patent expirations, channel shifts that are not likely to come back per se. But I think in these cases, companies are looking to diversify through either acquisition or find cost saves in general through AI. And then the last kind of broad themes that we heard discussed by investors and companies were kind of around, you know, the rate backdrop, increasing yields, increasing does this have an impact on companies who are closer to free cash break, even have upcoming debt maturities.

And then certainly the election in terms of what that could do to the outcome for our healthcare companies. Aaron, I'll kick it to you. Yeah.

Thanks, Miles. In ad driven media, particularly broadcasting, secular evolution remains at play, but cyclical factors garnered the most discussion. The election cycle this year is driving record amounts of high margin political advertising spend.

We had one company put that in print right ahead of the conference and several others at the conference echo the sentiment. This is helping counter some softness in select core advertising categories that are being impacted by the macro backdrop, including high fuel prices. And I would say that consolidation thus far has been more muted than expected.

Given recent media ownership deregulation at the federal level, separate from ad driven media on the professional services side, stable organic revenue growth continues to be supplemented by strategic M&A. Andrew, housing is the poster child for rates. When you sat down with the builders, what did they actually tell you?

And is there anything outside of housing holding up? Yeah, thanks, Aaron. So we had a range of folks on the value chain at the conference.

We had manufacturers, distributors, and home builders. You know, I'd say on the builder's side, they were pretty candid and gloomy overall. You know, just yesterday, the 30 year mortgage hit 7.36%.

And I think what they discussed was that traffic has actually gotten more challenged and accelerating to the downside over the last few weeks. You know, when we think about rate buy downs, remember, this is the way the builders can create low mortgages for buyers. Those are already in place, but now sentiment's gotten so bad that folks don't even spend the time to come out to communities to even try to get those advantageous rates.

I do think builders are starting to prepare for a long winter. We heard an anecdote that a builder has de-staffed some communities. That just means they're taking salespeople and managers out of a single site and spreading them over multiple ones to save on costs.

They've also turned around to leasing some of the homes just to earn some yield on the assets. We heard some builders are trying to defer a lot takedowns from their land banks and just pay the extra carry to wait out what's been a challenging demand environment to turn. I think as far as builders and kind of creativity on costs, you know, one builder actually told us they're installing windows that don't open just to save a few hundred dollars.

I think that's clever for sure, but I don't think there's a way to value engineer your way out of what's going on. Affordability gets solved by rates and home prices, and reducing home prices by 1% isn't going to move the needle. I think the other thing that came out was that this is certainly a K-shaped demand outlook depending on where you're at on the economic spectrum.

If you're in the luxury part of the market, that's holding up much better than where the entry level is, which is much more challenged. And then if you think about new residential versus remodeling, the latter is certainly holding up better. People who are already in their homes keep spending money on them, although they've downsized into smaller projects versus, you know, full-blown kitchen remodels.

And then we also hosted a panel with a leading housing research firm, and I do think, you know, they characterize it as the spring is coiling, and people will ultimately spend money on homes because they are used to a certain quality of living, but it's just a matter of when that gets unlocked. And I think the one bright spot, again, is the non-residential side. Anybody that touches infrastructure and data centers certainly had some optimistic outlook.

So as we kind of look at 2027, I think housing continues to be in a wait-and-see mode. I would say we continue to think a flat market in 27 is probably a good outcome, and I get the sense that investors are starting to prepare for that or another down year. So what I wanted to do was also move to price, cost, and margins.

So Aaron, let's have you go for the first time. So are companies, you know, you follow winning on price, cutting of costs? Are they getting squeezed?

And then how would you kind of characterize the cost that management teams are focused on and which general pricing powers we shift into 2027? Given the secular forces at play for many of the traditional media companies that I follow, cost reduction efforts have been a way of life for some time now. We're seeing many companies implement and utilize AI to streamline business flows and make day-to-day operations more efficient.

I would say on the professional services side, we continue to see offshoring utilized as a margin enhancement tool, as well as realized scale benefits on the back of considerable M&A that's been taking place in the space. Myles, how about you? Yeah, so I think, you know, healthcare has so many different subsectors within the space and companies within the subsectors.

But broadly speaking, I think for steady state businesses, margins are probably looking to remain flattish, maybe slightly negative as we go into 2027. We've got pressure on price, commercial largely, potentially some Medicaid. And then supplies and wages are some areas on the expense side where companies are having to consider these nuances.

I think they'll look to address these where they can in terms of, you know, cost cuts and AI where they can only mitigate and not address the specific pressures. But in terms of the specifics, you know, labor is better than it has been. Supplies in some instances, companies have talked about unilateral price increases on supplies.

And that becomes, in our opinion, a function of, you know, what is your position in the industry? And that's more of a national or regional scale than a local scale, which is what healthcare tends to be, you know, more broadly when you're talking about wage negotiations or commercial price negotiations. They tend to be very local in nature.

But some of these on the supply side and others can be national. And that's where you have companies that have significant market share, significant customer presence can fare better in those types of situations than those who are smaller. You know, I think we've heard this from some healthcare companies for some time now where certain payers have been pushing through price either because of their own pressures or using AI to push on payment.

They have the resources to invest in AI and deploy this. So I think the response from the providers can be, OK, again, if you have a very significant investment in your own revenue cycle management with its own AI, you might be able to combat that better than if you had not done that or if you weren't partnered with somebody on the RCM side that can handle that type of activity. So a little bit of an arms race there.

But again, kind of broadly speaking, looking to, you know, ideally see margins kind of unchanged in 27. Maybe the reality is there there's a slight amount of pressure. Andrew, what about you?

How do you kind of think about, you know, costs and margins? Are companies, you know, focused on price, cutting costs, getting squeezed? Where do you see the bulk of the focus and where's the power shifting in the 27?

Yeah, so I would say as we think about the backdrop from second quarter, I do think there was some client relief that margins held up better than what the volumes would have suggested. I think one of those dynamics is the best pricing environments where inflation is well known and no one's surprised by getting a price hike letter. So I do think a bunch of the companies that we saw did price ahead of what their realized costs were this year.

So I do think folks should be mindful of that give back potential as we think about the second half and when that higher cost inventory starts to show up. As far as inflation at 27, you know, listen, I think costs are still going to be higher year over year, but manageable. Obviously, the tariff environment remains very fluid.

We have to worry about more escalation or less escalation out of the U.S.-Iranian conflict. But I think in general, folks are still expecting inflation across all types of categories. This is industrial metals, freight-related line items and healthcare costs.

I think, you know, as it relates to your question on pricing power, I think this largely just depends on where you're at in the value chain and who your end customers are. So we talked about luxury buyers. I think they're much more capable of accepting price hikes that was supported by commentary from a few manufacturers, including one that sells very high-end decorative lighting.

And with that said, it's obviously the complete opposite at the entry level where pricing is still super competitive. Another dynamic that came up and bears watching is the disruption that's coming from all the consolidation in building products and home builders. The one obvious focus is on the home centers and the public consolidation platform that's out there and how that's all going to come together and change economics in the building product industry.

It did feel like the distribution channel may see some structural margin pressure over time. We did also hear a couple anecdotes about how builders are looking to just go direct to OEMs and how one distributor is trying to just tie the entire building package and bring that to the job site. So it seems like there's a whole lot of trying to cut one another out of the value chain.

So guys, I wanted to just end on AI and technology. So Miles, you know, once you go first, if you could give me a number 1 to 10 on how tangible the AI discussion was versus how much was just exploratory and just ideation. And if you could kind of talk about where that's showing up, if at all, and if the companies have the systems and data to make it pay off.

Yeah, I would say, you know, it does vary by company. But from some of our takeaways from the conference, more measurable than not, I'd say it's more like a 7 or an 8 out of 10. Definitely EBITDA, you know, benefits, cost savings being quantified, investments being quantified.

I think, you know, there is an investment associated with this and some expenses, but it feels like in the near term that, you know, these investments are very justified by the potential for cost saves and EBITDA growth, you know, in the coming years. I think in terms of where they're using it, we're seeing it already for claims adjudication through revenue cycle. We're seeing companies, you know, handling various tasks through AI that can be done cheaper now, again, with the reduction of personnel and, you know, all the way through to things like assisting with professional interpretations.

So it's mostly around cost saves now, although I think some companies are able to tout a superior AI-backed offering and potentially take some share as well. So broadly speaking, I would say, you know, it feels like more of a positive and an opportunity in the next one to two years. I think, you know, we get some questions from investors around, you know, will it continue that way?

And I think it might take some time, but the concerns are around, hey, you know, if some of these things can be done much, much cheaper, does that, you know, pose a risk to the overall pie in the spend? So, you know, essentially, if the cost of performing certain services is much lower and call it three, four, five years, does that mean that'll get passed through in the form of, you know, lower prices that these companies can charge for these services if there's competition on that front? So I think that's where people have more pause and more concern, bigger picture, but certainly for the near term, it feels like, you know, very positive and, you know, benefits coming from cost saves and EBITDA growth.

But Aaron, what about you on the AI side, technology, automation, what are you guys seeing? I think AI continues to be a focal point for professional service firms. The conversations overall, I would say, were more exploratory at this point, not a lot of granularity or details to date.

But thus far, the message from those management teams is overwhelmingly that AI is an opportunity rather than a risk, both in terms of revenues as well as costs. Investors though, understandably, continue to ask questions around longer term impact on pricing models, demand, and as well as margins. Andrew, your companies make garage doors and steel hooks, is AI even on the radar?

And what number are you giving to this answer? Yeah, I'd say it's similar to what you had said. I'd give it probably a four out of 10.

You know, the talk is there, but I'm not sure I walked away with a ton of tangible evidence, more anecdotal. You know, one thing I would just call out is there was a distributor that talked about spending $10 million on an AI system that they put atop their CRM. And the idea behind that was to do a better job selling.

They thought that ultimately that could have a 10x payoff, which is a great number. But certainly, you know, it's a TBD when we see that. We also visited the site of a window manufacturer.

They're using AI to plan production processes on their manufacturing floor and improve operations, which I thought, you know, I think that showed up just on how few employees there were. But we did ask them also about would they use humanoid robots? And there wasn't much evaluation of that opportunity.

I think the management team took the view that they want to just not be the first adopter. They'd rather spend the money elsewhere and then see what the use cases and technologies are before they land up being the first. And then as far as, you know, data and consolidating and harmonizing that across operations, you know, ERP came up a lot.

You know, many of my names are active on the M&A front. They're in the process of integrating. So I think some of the issue may be that I can't happen without conformity of data.

So it seems a real tangible savings and dollars are probably a 2028 story. So what I want to do is wrap up with a real quick lightning around, guys. So two questions.

What was the most overhyped theme at the conference? And then in one sentence, do you think your sector is entering 2027 in better or worse shape than 2026? So, Aaron, you can go ahead and go first.

Yeah. Could it could be most overhyped one be the amount of steps everyone was taking walking around the sprawling grounds of the hotel where the hotel of the hotel where the conference took place? Perhaps.

But, you know, look, I would say the the most discussed topic at the conference for us was understandably that aforementioned recent record setting debt issuance in the media space. And then secondly, the other theme was that that was topical was the rate moves that were playing out real time and that if sustained, what risk that poses for more levered credits that have a need to come to market over the near term horizon that will clearly remain a focal point for investors across many different sectors, not just my universe. And in terms of entering 2027, is our is my sector in better or worse shape than it entered 26?

I would say broadly, broadly speaking, better shape than it entered 26 from a leverage and maturity profile standpoint. But cyclical considerations will be front and center in a non-election, non-major sports events year. How about you, Miles?

Yeah, I think very overhyped AI, most topical, as we said before, margins. And I do think election and rates, you know, widening as it relates to refinancing in coming years, especially for companies more at the margin of free cash flow, we're probably most talked about in terms of, you know, looking into 2027, our is the sector entering in better or worse shape, you know, even with a little bit of margin softness expected, I would say last year this time there was so much anxiety around OB three and Medicaid cuts and exchange subsidies expiring. And now we have a little more information, at least around some of those things and the potential for election.

So I would say slightly better, slightly less anxiety going into the end of this year and beginning of 27 than there was this time last year. Andrew, what about you in terms of what was the most overhyped themes and how's your sector positioned going into 2027? Yeah, I'm not sure I can come up with a singular item.

I mean, if anything, it would probably be that rate buy downs and rates can single handedly fix housing. You know, the problem is these have been around for a while and folks know they can get cheaper mortgages through some of these builders. But I just don't think that's able to counteract the home price appreciation.

And as far as the 2027 outlook, I mean, listen, sentiment was pretty bad in 2026 and things are tough. So it's hard to think that there's there's a there's not a low hurdle to get over. But I do think 2027 could possibly be worse, something we have to watch.

Again, as we talked about, repair and remodel is going to hold up better than new residential and infrastructure and non-resi, certainly touching data centers are going to outperform those two. But certainly everything lands up being probably a pretty, pretty flattish outcome year over year. So with that, we're going to wrap.

I want to just thank Aaron and Miles and to everyone who joined us at the conference. If you would like any additional information about what we've discussed here today, please reach out to your Deutsche Bank representative. You've been listening to Podsept.

Podsept, the podcast from Deutsche Bank Research. This podcast has been produced by Deutsche Bank and may contain research as defined in Method 2. The information discussed is believed to be reliable and has been obtained from public sources believed to be reliable, although Deutsche Bank makes no representation as to its accuracy or completeness.

Opinions, estimates and projections discussed constitute the current judgment of the speaker at the time of recording. They do not necessarily reflect the opinions of Deutsche Bank and are subject to change without notice. For further important information, please visit research.db.com.

Conference Insights: Thoughts from our 2026 Leveraged Finance Conference

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Conference Insights: Thoughts from our 2026 Leveraged Finance Conference

What the desk is arguing

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