Opinions Abound on Floating-Rate Loan Credit Health

by Scott Page of Eaton Vance, 11/26/18

Boston - We've managed client assets in floating-rate corporate loan strategies since 1989. Our longest-running fund will surpass its 30-year mark in 2019. Along the way, we've developed deep expertise in this asset class. Today we manage more than $45 billion in floating-rate corporate loan assets, for clients all around the globe and in every discernible delivery format.

As experts in this field, recent media coverage surrounding floating-rate loans reminds us of the phenomenon of Gell-Mann's Amnesia. Coined by the late Michael Crichton, the author and film director made the reference in relation to his physicist friend Murray Gell-Mann, who discovered (and named) the concept. To quote Crichton's "Why Speculate?":

Media carries with it a credibility that is totally undeserved. You have all experienced this, in what I call the Murray Gell-Mann Amnesia effect. (I call it by this name because I once discussed it with Murray Gell-Mann, and by dropping a famous name I imply greater importance to myself, and to the effect, than it would otherwise have.)

Briefly stated, the Gell-Mann Amnesia effect works as follows. You open the newspaper to an article on some subject you know well. In Murray's case, physics. In mine, show business. You read the article and see the journalist has absolutely no understanding of either the facts or the issues. Often, the article is so wrong it actually presents the story backward--reversing cause and effect. I call these the "wet streets cause rain" stories. Paper's full of them.

In any case, you read with exasperation or amusement the multiple errors in a story - and then turn the page to national or international affairs, and read with renewed interest as if the rest of the newspaper was somehow more accurate about far-off Palestine than it was about the story you just read. You turn the page, and forget what you know.

That is the Gell-Mann Amnesia effect. I'd point out it does not operate in other arenas of life. In ordinary life, if somebody consistently exaggerates or lies to you, you soon discount everything they say. In court, there is the legal doctrine of "falsus in uno, falsus in omnibus", which means untruthful in one part, untruthful in all.

But when it comes to the media, we believe against evidence that it is probably worth our time to read other parts of the paper. When, in fact, it almost certainly isn't. The only possible explanation for our behavior is (actual) amnesia.

Back to loanland, we've always been a little dismayed by the hyperbole so frequently found in media coverage surrounding our asset class. The market never just "grows". It's "explosive growth". Credit conditions never just weaken. It's "extremely aggressive underwriting". And so on and so forth. Take a kernel of fact and then completely twist the meaning. As the latest examples, references to "covenant-lite" or "loan only" capital structures have increasingly been invoked, sparking fear (and driving web clicks) but without the "yes, but" context required to garner a complete understanding - full disclosure that in our opinion would leave most people unworried and more than likely encouraged. But no matter: Splashy headline printed, click generated, advertiser dollars raised.