9Questions is our Q&A series featuring key decision-makers in the corporate credit markets — get in touch if you know who we should be talking to!
With M&A activity slower than many had anticipated and questions lingering around the trajectory of US rates, investors are reassessing where value truly lies across regions, sectors and the capital structure.
9fin discussed the outlook for leveraged finance in 2026 with Michael Graham, head of US high yield at AXA IM Core, part of BNP Paribas Asset Management. From the growing impact of AI-related disruption in credit to how he would rethink his 2025 positioning with hindsight, Graham shared how he is positioning across US and European high yield — and where he believes the market is mispricing risk.
1. Once again, the ‘rebound’ in M&A/LBO activity appears to be smaller than the market had hoped for. From your perspective, is there still a valuation gap between buyers and sellers, or are sponsors simply waiting for the Fed transition in May to see where the cost of capital ultimately settles?
The cost of capital is not the only driver for the level of M&A activity, though it can play a role in the valuation gap between buyers and sellers. I do not think just one or two cuts, as projected by many in the market, dramatically alters the M&A landscape. Still, it feels like the criteria could be there for M&A to pick up later this year.
2. If you could replay your 2025 positioning with hindsight, what would be the single biggest change you would make to the portfolio?
I would likely have a different answer for each of our unique strategies, depending on their risk profile. For our more aggressive products that aim to produce equity-like returns through a cycle, we clearly did not add enough risk and yield to the portfolios fast enough during the short market sell-off in April. We were a buyer during this period, but admittedly we thought we would have a little more time to increase the risk and return potential in these portfolios. For our more defensive strategies, I’m happy with how we minimised credit risk throughout 2025, by avoiding a lot of problem credits that have underperformed during this period of strong returns and high dispersion.
3. Which sector do you think the rating agencies are getting most wrong today, in which direction?
We believe rating agencies consistently over-rate commodity driven, asset-heavy companies with high capital expenditure needs, even if it seems they have lower leverage at a certain point in the economic cycle. Conversely, we believe they tend to under-rate predictable, service-oriented businesses with minimal capital expenditure needs, even if they have a higher leverage profile.
4. Everyone talks about widening dispersion — where do you see the biggest gaps between winners and losers?
The higher dispersion is certainly taking place within the lower credit quality segment, and that can continue in 2026. From a sector perspective, we have seen significant dispersion in the chemicals sector, and the recent dispersion between some of the more global basic chemical companies and their distribution, or specialty chemical company peers, is justified.
5. We have only recently begun to see selling pressure on some sectors where the potential for AI disruption is greater. Compared to equity markets, have credit markets been too complacent regarding this risk?
The performance of companies that may have AI related disruption to their business models has the potential to have a big impact on the overall HY market in 2026. The AI disruption analysis is very credit-specific, and there is the potential for high dispersion within certain exposed sectors. Generally speaking, we have seen meaningful equity multiple compression in software and data service companies where the impact of AI remains uncertain, and only recently have we begun to see an increase in yields in the bonds of many of these companies.
Even if the AI-disruption fears are overdone for some companies, the equity cushion behind the debt is smaller today, so some repricing of the debt is rational. From a technical perspective, the high exposure leverage finance investors have to the software sector across bonds, loans and private debt warrants some caution. The volatility will present attractive opportunities in many credits in the near term, while some credits still need a higher return potential to compensate for the potential risks.
6. On a risk-adjusted basis, where does European HY still offer an edge over US HY, and where does it clearly lag?
On a currency hedged adjusted yield, the European HY market can provide additional carry over US HY within certain risk segments of the market. Overall, we think the market is efficiently priced between the two regions today, resulting in our global portfolios having a neutral geographic positioning compared to the index. That said, we do see some advantage in the mid-quality intermediate duration segment of the Euro HY market when compared to the US HY market.
7. Where are you seeing better risk-reward today: in new issues or secondary trading?
The HY market has experienced improvement in credit quality in recent years and a very strong demand technical. While that combination has lowered the volatility of the asset class relative to other risk asset classes like equities, it has unfortunately also lowered the yield premium investors have historically received in the new issue market. Still, the new issue market has an advantage in the ability for investors to source bonds at the bid side, and in some cases with additional concession. On the front end of the curve, the secondary market remains very well bid, but value can still be found if you take a separate view to the market on when a security is expected to be refinanced.
8. What is a contrarian view you hold on the European high-yield market that most of your high-yield peers would currently disagree with?
Our most contrarian views will be on specific credit investments, which today would be credits in a variety of sectors including, but not limited to, services, media, software and chemicals. From a top down perspective, our global HY strategy has a big underweight to BB-rated securities in both the US and Euro HY market. Given the high demand we see in both the primary and secondary markets for BB-rated debt, our positioning certainly feels contrarian.
9. What is the most important lesson you have learned about credit or portfolio management that came from an experience entirely outside of finance?
I suppose one lesson I learned from playing sports over the years that can apply to investing or portfolio management is the importance of staying focused on the ‘next play’. With sports, whether you just made a good play or a bad play, you need to immediately focus on the next play to be successful. With investing or portfolio management, you cannot spend time celebrating good investments or dwelling too much on poor investment mistakes. The ability to quickly appreciate the lessons learned on the investment and assess the next play, whether that’s selling or buying more of that winning or losing investment, or simply focusing on the next opportunity, is key to longer term success.
