“When is the credit cycle going to turn?” It feels like we have been hearing—and asking—that same question for several years now. And in an era marked by uncertainty, we are at an especially uncertain crossroads right now in the bond market. The Fed’s path forward over the next couple of years is fairly murky. Economic indicators are mixed--unemployment and inflation numbers generally remain healthy, while other signs (dwindling home and auto purchases, falling capex, declining manufacturing output) point to slowing growth. U.S. trade policy and Brexit, among other factors, are additional flies in the ointment. It is always dangerous, in our view, to build bond portfolios that make explicit bets on macroeconomic or interest-rate outcomes. That maxim is especially true right now. Fortunately, we are still finding plenty of attractive credit opportunities that aren’t unduly exposed to recession risk or other economic factors, in our view. When we evaluate bonds for our portfolios, we focus heavily on identifying and pricing downside scenarios, which helps us to spot situations where the risks may not be properly priced in. We are also flexible, and seek to invest up and down the credit spectrum based on where we’re finding value—we can take advantage when spreads are compensating us for risk, and retreat when they are not. We find that this cool and calculated approach is absolutely essential to our success, especially during periods of market and economic stress. These examples illustrate the types of opportunities we are exploring as concerns about the bond market heat up: KeHE Distributors is the second-largest natural and organic specialty food distributor in the U.S. The company benefits from strong growth trends in its sector and solid contracts with growing customers. Over the past few years, KeHE completed a number of acquisitions and onboarded several large new customers, creating a number of integration challenges. With those challenges behind it, we believe KeHe is in a strong position to drive operating efficiency going forward. We also believe that KeHE is well positioned to win business from rival United Natural Foods. United Natural’s merger with SuperValu could lead to its own series of integration challenges, a factor that may already be concerning to many of United Natural’s current customers. Given a favorable current market for asset-based lending facilities, KeHE may have attractive options to refinance its capital structure as soon as late 2019 or early 2020. We see this situation as an idiosyncratic refinancing risk that is moderately isolated from broader macroeconomic uncertainty. After several quarters of improved gross margins for KeHE (a promise fulfilled by management, on the heels of its stated refocusing on operations), we opened a position in KeHE bonds in late January, at a price we thought was a discount to the bonds’ intrinsic value. Hot Topic is a fairly mature “alternative” fashion retailer, and Torrid is a retailer of clothing for plus-sized women that, for many years, was owned by Hot Topic. A private equity firm took Hot Topic private in 2013, and at the time, the Torrid brand, though losing money, was growing rapidly. That firm separated Torrid into a separate, non-recourse entity, and subsequently Torrid’s results took off while Hot Topic’s plummeted, thus destroying a great deal of value for holders of Hot Topic bonds. Those lenders sued and the suit was recently settled. The private equity firm has now pledged Torrid as collateral to Hot Topic bondholders and is actively paying off the bonds. Before the settlement, we could have bought the Hot Topic bonds at a considerable discount, but we were not comfortable betting on the binary outcome of the legal proceedings (importantly, because we were not a part of the group of bondholders pursuing legal action, we were at an inherent informational disadvantage to that group). We instead waited for the lawsuit to be resolved before investing. We feel confident that, with Torrid pledged as collateral, the business owners will protect the value of Torrid providing solid cash flow to repay the Hot Topic debt, regardless of the economic environment. Both of these examples offer a window into how we think about and evaluate credit opportunities. Every situation is different, but we always need to balance the creditworthiness and long-term value of securities against the short-term situations—macroeconomic or otherwise—that influence the price of those securities. Ultimately, we only invest in situations where the risks are things we can understand and evaluate, such as company-level opportunities and challenges, and we try to avoid situations that are dominated by macroeconomic risks that we cannot predict or control. The views expressed are those of Brown Advisory as of the date referenced and are subject to change at any time based on market or other conditions. These views are not intended to be and should not be relied upon as investment advice and are not intended to be a forecast of future events or a guarantee of future results. Past performance is not a guarantee of future performance and you may not get back the amount invested. The information provided in this material is not intended to be and should not be considered to be a recommendation or suggestion to engage in or refrain from a particular course of action or to make or hold a particular investment or pursue a particular investment strategy, including whether or not to buy, sell, or hold any of the securities mentioned. It should not be assumed that investments in such securities have been or will be profitable. To the extent specific securities are mentioned, they have been selected by the author on an objective basis to illustrate views expressed in the commentary and do not represent all of the securities purchased, sold or recommended for advisory clients. The information contained herein has been prepared from sources believed reliable but is not guaranteed by us as to its timeliness or accuracy, and is not a complete summary or statement of all available data. 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