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Speaker 1: Well, a suggestion from the fund manager in ninety one

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Speaker 1: that the private credit market and emerging markets might be

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Speaker 1: a better investment and private credit markets in the US,

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Speaker 1: or certainly than the US private credit markets gets a

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Speaker 1: bit technical, but essentially we looking at how different markets

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Speaker 1: are changing and their positions relative to each other right

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Speaker 1: now are different from what they were before. Martin Pruz

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Speaker 1: is the co head of Emerging Market Alternative Debt at

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Speaker 1: ninety one. Martin, good evening, and thank you for your time.

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Speaker 1: It's such an interesting suggestion. What do you think has

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Speaker 1: changed and I suppose particularly in the US that is

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Speaker 1: making you suggest this.

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Speaker 2: Hi, good evening, and thank you for having me on

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Speaker 2: the show. What we have seen since a global financial

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Speaker 2: crisis that the private credit SS class has grown too

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Speaker 2: roughly about three trillion dollars at a moment, and this

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Speaker 2: market has been grown very fast and has done very well.

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Speaker 2: But in the US we see in some parts of

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Speaker 2: that market facing challenges. Some data seems to suggest that

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Speaker 2: the default rate has hit nine point two percent over

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Speaker 2: the last twelve months, and that's a clear sign of

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Speaker 2: some stress. What we have seen there is that the

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Speaker 2: private credit boommont was built on significant liquidity and relatively

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Speaker 2: low cost funding, and that has perhaps resulted in some

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Speaker 2: more losing loose lending terms, especially the growth of covenant

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Speaker 2: light loans structures which strip out maintenance covenance early warning

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Speaker 2: systems for lenders. These loans also carry often a high

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Speaker 2: level of structural subordination compared to lenders that typically would

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Speaker 2: lend at the asset levels. And when base rates remained

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Speaker 2: high and borers took out floating rate debt at about

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Speaker 2: six to seven times their earnings, we see now those

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Speaker 2: borders struggling to cover their debt service payments. And this

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Speaker 2: is what's happening in the US. And consequently lenders and

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Speaker 2: borers have been more using more paying kind loans where

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Speaker 2: then interest is not paid, but cash is ruled up

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Speaker 2: and added to the outstanding debt, which is effectively means

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Speaker 2: kicking the can down the road and not resolving the

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Speaker 2: issues on the line in these businesses. So what we're

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Speaker 2: seeing today in the US is kind of the structural

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Speaker 2: consequences of a market that grew probably too quickly, where

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Speaker 2: competition has driven down yields and probably weekend structuring standards

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Speaker 2: in a borer's market.

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Speaker 1: Okay, so then all of us means that that picture

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Speaker 1: is slightly riskier an emerging markets. I mean generally people

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Speaker 1: emerging markets are sort of see you know, people are

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Speaker 1: risk averse about emerging markets for a reason. There's something

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Speaker 1: about the structure of companies that are in that market

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Speaker 1: that would seem to make them quite attractive.

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Speaker 2: Yeah, So what we see in emerging markets, you know,

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Speaker 2: these are fast growing economies. You see urbanization, so there's

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Speaker 2: a lot of need for what we call ast heavy

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Speaker 2: infrastructure and all their corporates that need funding. And our

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Speaker 2: experience in these markets it is less crowded. You know,

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Speaker 2: in the US and other parts of the development markets,

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Speaker 2: we see much capital chased, only so many gills, leading

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Speaker 2: to yield compression and perhaps loser covenance. In emerging markets,

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Speaker 2: the private credit market is still relatively nascent. Local banks

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Speaker 2: can only do so much, and in terms of liquidity

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Speaker 2: sometimes they are constrained. International capitals still somewhat scars. And

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Speaker 2: then borrowers generally need what we are offering. In these markets,

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Speaker 2: you see some excellent companies, and in these markets we

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Speaker 2: typically can structure and stipulate our collateral protections and the

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Speaker 2: convenance that we want and This kiss us as lender

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Speaker 2: structuring and negotiation power and makes us more resilient through

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Speaker 2: a full credit cycle.

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Speaker 1: If you look at the situation in the US, is

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Speaker 1: part of your concern at all related to AI? And

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Speaker 1: I realized, Martin, I can fall into the drop of

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Speaker 1: blaming AI for everything, as everybody does nowadays. And there

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Speaker 1: was a time when it looked like, you know, the

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Speaker 1: world would be vulnerable to a kind of AI crash

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Speaker 1: or a bubble would burst. It doesn't, It doesn't look

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Speaker 1: like that would happen, but there will be a lot

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Speaker 1: of disruption, and in that disruption, some people will lose value.

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Speaker 2: Yeah, that is certainly the case. That some parts of

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Speaker 2: the US private credit market became heavily concentrated to software

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Speaker 2: companies and software as a service company. These were typically

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Speaker 2: fast growing but relatively asset light businesses that banks banks

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Speaker 2: typically wouldn't lend to. And now what we see is

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Speaker 2: that AI is disrupting those very businesses, compressing their revenues

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Speaker 2: and making loans underneath more challenging. So AI has a

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Speaker 2: lot to offer. You know, we as a business use

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Speaker 2: it every day already, and it makes us more productive.

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Speaker 2: But specifically in the US where we saw challenges around

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Speaker 2: software and software as a service companies, and AI is

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Speaker 2: particularly impacting those businesses. What we are doing as ninety

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Speaker 2: one in emerging markets is more dominated by asset heavy

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Speaker 2: cash flow generative borers, and therefore we are more limited

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Speaker 2: have more limited exposure to sectors that are vulnerable to AI.

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Speaker 2: Think of infrastructures such as data centers, telecoms, hours, power

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Speaker 2: generation companies are transport physical infrastructure, right, and these sectors

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Speaker 2: are typically positively impacted by AI as it makes these

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Speaker 2: services more efficient.

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Speaker 1: So I accept the argument about emerging markets versus the

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Speaker 1: US when the situation in Iran up end all of this.

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Speaker 1: I mean, the whole world is vulnerable to an oil shock,

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Speaker 1: but usually the emerging world seems to be more vulnerable

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Speaker 1: and certainly less able to really respond. I mean, we

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Speaker 1: can't all move over to electric cars, whereas people in

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Speaker 1: the United States probably could.

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Speaker 2: Yeah. So, obviously, the unfortunate events are disrupting the world,

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Speaker 2: and we're starting to see the first signs of that.

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Speaker 2: What I think it will do is that what we

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Speaker 2: have seen in these markets, whatever happens, is that how

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Speaker 2: resilient these markets are. You know, we have been investing

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Speaker 2: in Africa for over twenty years. We have had a

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Speaker 2: global financial crisis, we had a commodity crisis, we had

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Speaker 2: currency crisises, we had COVID and despite all that, our

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Speaker 2: loss rates on the content of Africa and other emerging

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Speaker 2: markets is still relatively low. So, yes, there are certainly

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Speaker 2: disruptive events, and what's currently happening will be disruptive. But

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Speaker 2: if you find the right fundamental, strong businesses, you have

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Speaker 2: a good credit case, and even through these events, you

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Speaker 2: will get through. And you might see default rates being

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Speaker 2: elevated for a period of time, but recovery rates are

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Speaker 2: always high as well, even in decent areas.

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Speaker 1: Thank you very much, I really to appreciate that time.

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Speaker 1: Martin Bruss is the co head of Emerging Market Alternative

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Speaker 1: Debt at ninety one